BAT begins marketing M&A bond

(Updates throughout)

By Laura Benitez

LONDON, Aug 9 (IFR) - British American Tobacco (Kuala Lumpur: 4162.KL - news) opened books on a four-part euro and sterling-denominated bond on Wednesday in a bid to complete its financing for the US$49bn purchase of Reynolds American (NYSE: RAI - news) .

The maker of cigarette brands, such as Dunhill and Lucky Strike, started marketing three benchmark sized euro-denominated tranches and a sterling benchmark piece after raising US$17.25bn in the US market on Tuesday.

The transaction will gauge European investors' risk appetite for the firm, which faces corruption probes, and the tobacco sector more generally amid increased regulatory scrutiny.

Some investors said the premium BAT will need to offer is at least 15bp to account for a string of negative headlines over the last week.

Marketing during the summer period could also add some pressure on the deal's execution.

"It's been tough because it's August with some European investors not being here, there are a lot of balls in the air with this one," a lead banker said during the marketing process earlier in the week. BAT undertook two-day of investor meetings on Monday and Tuesday.

The market is also poised for any hints from the European Central Bank it will taper its Corporate Sector Purchase Programme soon.

"We just don't know what the outcome will be and we expect to see so many companies frontrunning that meeting so a splurge of supply could hinder well-flagged trades like this," another banker said.

"We're starting to see some wider market volatility too that is impacting equity, and by September, we could see it hitting credit."

BAT started marketing a euro four-year floating rate note, a euro 6.25-year fixed rate, a sterling eight-year and a euro 12.5-year.

The four-year tranche is marketed at three-month Euribor plus 65bp area, the 6.25-year is marketed at 90bp area over mid-swaps, the sterling eight-year is marketed at 150bp-155bp over Gilts and the long euro tranche at 130bp area over mid-swaps.

TOUGH TIMES

The company was slated to issue the bonds at the end of July, sources told IFR, following its results announcement and shareholder meeting.

But its ambitions were thwarted after news that the company and its subsidiaries are being investigated for corruption by Britain's Serious Fraud Office.

BAT's bonds had previously been hard hit when the US Food and Drug Administration announced plans last month to reduce nicotine levels in cigarettes and explore measures to move smokers toward e-cigarettes.

Its 3.125% March 2029s widened 10bp on the day the FDA news broke on July 28 to 95bp over mid-swaps, and a further 4bp last Tuesday when the SFO probe was disclosed to 99bp. That paper has since widened by almost 2bp in the last few days.

Last month's major regulatory shift by the FDA sent the FTSE index of traditional cigarette companies' shares falling to 65.23 from highs of 71.5 in late July.

BAT said in a statement it intended to cooperate with the SFO investigation, but did not provide any more details.

SWEEPS UP IN DOLLARS

BAT brought the second-largest bond of the year to US market on Tuesday, attracting US$35bn of demand for the US$17.25bn trade.

However, the transaction was thought to have over allocated investors who were a bit tougher on pricing than they had been in recent weeks.

BAT's mammoth deal followed US$125bn of investment corporate supply in the US market in July.

Unlike many recent deals that routinely allowed borrowers to ratchet in pricing around 25bp from start to finish, BAT only managed to tighten levels 10bp-15bp across the tranches.

BAT, rated Baa2/BBB+ by Moody's and S&P, mandated Bank of America Merrill Lynch, Barclays (LSE: BARC.L - news) , Citigroup (NYSE: C - news) , Deutsche Bank (IOB: 0H7D.IL - news) , and HSBC for the dollar piece and Deutsche Bank, ING, NatWest Markets, Santander, and Societe Generale (Swiss: 519928.SW - news) for the euros and sterling notes. (Reporting by Laura Benitez,; Editing by Alex Chambers and Helen Bartholomew.)