Philip Morris bond tries to find the right snuff

NEW YORK, Aug 18 (IFR) - Tobacco company Philip Morris International amassed an order book of US$2.4bn for its US$1.25bn investment-grade bond deal on Monday, leaving the trade slightly less than twice covered.

The sector's second deal in as many weeks - after the recent US$17.25bn offering from rival British American Tobacco (Kuala Lumpur: 4162.KL - news) - left some feeling oversupplied, one bond buyer said.

"We just had a big tobacco deal," he told IFR. "That's all that's going on there."

Even (Taiwan OTC: 6436.TWO - news) so, Philip Morris (A2/A/A) paid a new issue premium of just 3bp on both the US$750m five-year, which priced at 70bp over Treasuries, and the US$500m 10-year that crossed the line at plus 95bp.

Lower-rated BAT by contrast had to pay roughly 7bp-12bp in premiums to close its deal, which included a piece with a 30-year tenor.

Philip Morris last came to market in February, when it brought a US$2.5bn trade to refinance debt among other general corporate purposes.

The aim looked much the same this time around.

The company finished the second quarter with an "unusually high" US$5.2bn in short-term debt, according to analysts at GimmeCredit.

"We imagine this is the impetus for new issue," they said in a report on Monday.

Like other tobacco companies, Philip Morris - the owner of Marlboro and other iconic brands - is battling some headwinds in the sector.

A major regulatory shift by the US Food and Drug Administration saw BAT bonds struggle to gain much investor excitement.

The FDA said it was planning to reduce nicotine levels in cigarettes and explore measures to move smokers towards e-cigarettes.

But analysts say Philip Morris has a head start, with its advance work on risk reduction products including e-cigarettes and heat-not-burn products.

Philip Morris also benefits from a diverse global market share, which allows it to avoid some of the FDA impact.

GimmeCredit analysts said they found the new issue attractive, even on the assumption that pricing would be 15bp-20bp tighter than IPTs. It priced 15bp tighter.

"We like the strong debt-protection measures, geographic and product diversity, and ahead-of-the-pack position with reduced-risk products," wrote director of research Carol Levenson.

That said, M&A risk for the trade looks elevated on chatter about the potential for PM to reunite with fellow industry titan Altria.

The bond issue does not appear to contain the usual special mandatory redemption protections for investors. However, the chance of "getting the band back together" is low, GimmeCredit analysts said.

CreditSights analysts were more sceptical.

"Current spreads do not compensate investors for a potential reunification with Altria, which could result in substantially higher leverage," they wrote in July. (This story will appear in the August 19 issue of IFR Magazine.)