- March 27, 2012
Guess what the CDS price would be
If you guessed then I hope you are right but we certainly don’t know exactly what it would or should be.
Priceline sold $1 billion of 1 percent notes due March 2018 that may convert into 1.06 shares for each $1,000 of face value…….. The 2.875 percent Treasury bond maturing in March 2018 ended on March 7 at a yield of 1.11 percentaccording to Bloomberg News.
The implication being that the recent Priceline bond issue actually priced inside of US Treasuries. That’s right a triple-B rated corporate issuer sold bonds at a lower rate than where a AAA-rated (at one time considered the safest bond issuer in the world) government bond would need to pay over the same 6 year period. It is to be noted, however, that the embedded call option in the convertible bond is not taken into account when simply calculating a simple spread measure from the differences in the two bond yields and adjusting for the option adjusted spread would obviously change the numbers somewhat.
The stock would have to reach $944.61 by maturity for the conversion to be valuable, a gain of 50 percent from March 7, when the debt was sold. That’s the biggest convertible premium in more than a year. Priceline’s record close was $974.25 on April 30, 1999. It traded at $650.50 at 12:01 p.m. in New York.
While there is no actively traded credit default swap market on Priceline.com debt, one can only imagine what the CDS price for the issuer could be. Higher rated Goldman Sachs and Bank of America trade higher than the all-in pure yield of the recent Priceline bond issue. Even competitor Expedia, which actually has a more active CDS market, trades over 200 bps. As the story quoted,
“If I could get 1 percent on my money, I’d take it, even if I didn’t need it — which it looks like they have,” Tracy Young, an analyst at New York-based Evercore Partners Inc. said in a telephone interview.
The Priceline issue is the largest U.S. convertible bond since July 2010, Bloomberg data show. Issuers rated BBB pay about 3.79 percent on debt of similar maturities, according to the Bank of America Merrill Lynch U.S. Corporates BBB rated 5-7 Years index.
Now that makes even the lowest mortgage rates seem like a ripoff. If only you could attach a convertible option into your mortgage to garner an even lower rate that allows your bank to convert its debt into some equity in your house if and when the long-awaited US housing market recovery takes hold.
For another example, take a look at the Coca-Cola Company which also recently issued record low bonds but, unlike Priceline, actually has some actual CDS outstanding. Coca-Cola 5-year CDS is currently priced around 50 basis points (and has actually been on the rise since recent lows of 35 basis points a year ago). The issue was not convertible. Its 2-year floating rate bonds were recently issued at an interest-rate of 5 basis points below LIBOR and according to the same Bloomberg report, Its bonds yield 52 basis points more than Treasuries on average.
Three-month dollar Libor, the rate banks say they charge to lend to each other, was set at 0.47355 percent today, according to the British Bankers’ Association in London. Coca-Cola also issued $1 billion of three-year notes with a 0.75 percent coupon, matching its lowest on record, to yield 35 basis points more than Treasuries. The remaining $750 million consisted of 1.65 percent debentures due in March 2018.
By selling short-term debt, Coca-Cola is taking advantage of all-time low borrowing costs as the Federal Reserve keeps its target rate for overnight loans between banks in a range of zero to 0.25 percent. Investment-grade yields reached a record-low 3.4 percent on March 2, according to Bank of America Merrill Lynch’s U.S. Corporate Master index………
The rate on Coca-Cola’s three-year notes matched that given PepsiCo Inc. in a sale on Feb. 29. The Purchase, New York-based maker of Pepsi, Doritos chips and Quaker oatmeal issued $750 million of 0.75 percent debt at an identical 35 basis-point spread, even as the company ranks a step below Coca-Cola with an A at Standard & Poor’s, and has the same Aa3 grade at Moody’s Investors Service on “negative” outlook.
The gap in yields between Coca-Cola and Pepsi has tightened. In August, Pepsi sold $750 million of 3 percent, 10- year notes that yielded 97 basis points more than Treasuries, Bloomberg data show. Earlier that month, Coca-Cola issued $1 billion of 3.3 percent, 10-year notes at a spread of 72. Kent Landers, a spokesman for Coca-Cola, declined to comment on the bond sale.
Coca-Cola, whose products are consumed in more than 200 countries at a rate of 1.7 billion servings a day, pays less to borrow than PepsiCo on average. Its bonds yield 52 basis points more than Treasuries on average, compared with 72 for Pepsi, Bank of America Merrill Lynch index data show. The average of all consumer non-cyclical company debt is 130.
Pepsi and Coca-Cola’s credit profiles are “worlds apart,” said Joel Levington, head of corporate credit at Brookfield Asset Management Inc. in New York. “Pepsi’s U.S. soft drink business continues to struggle, management is being openly questioned on its strategies, and it’s becoming harder to make a case for a drinks and food company to be under one roof,” he said.
Coca-Cola’s long-term liabilities increased to $23.8 billion at the end of last year, from $9.6 billion two years earlier, Bloomberg data show. It assumed about $9 billion of debt when it bought the North American operations of bottler Coca-Cola Enterprises Inc. in 2010.
That hasn’t increased its borrowing costs. Traders pushed the price of its $327 million of 8.5 percent notes, issued in 1992 and due 10 years from now, to 144.4 cents on the dollar to yield 3.2 percent, Trace data show.
The last company to sell bonds that pay less than Libor, was Procter & Gamble Co., which issued $1 billion of floating- rate notes that pay 8 basis points less than the benchmark on Feb. 1, Bloomberg data show. The bonds climbed to 100.1 cents on the dollar on March 6, Trace data show.
P&G, the maker of Crest toothpaste and Pampers diapers, was the first to pay less than Libor since December 2006 when Wal- Mart Stores Inc. sold $1.5 billion of securities at 10 basis points under the benchmark. “It is unusual,” said Anthony Valeri, a market strategist with LPL Financial in San Diego, which oversees $330 billion. Coca-Cola may be able to secure such a low rate because it’s viewed as safer than banks, he said.
Three-month Libor has fallen from this year’s high of 0.58250 percent on Jan. 3. The rate reached 5.725 percent in 2007, before the worst financial crisis since the Great Depression. Coca-Cola bonds have the third-tightest spreads in the Bank of America Merrill Lynch index, trailing the 36 basis points on Colgate-Palmolive Co. debt and 50 at Cincinnati-based P&G.
Lending at rates that low don’t make sense for investors who may end up earning less than inflation, Cabot’s Larkin said. “It’s great for the company but why would you do that?” said Larkin, who bought Coca-Cola bonds in the past when they paid more interest.