Frightened Investors Prefer Shorter Unilever Tranches

The deal has been viewed as a "litmus test" for the bond market. But its success may be less than resounding.
Ed ZwirnOctober 17, 2000

Market sources both in and out of Unilever’s $7 billion bond offer say the deal will go through as planned.

The deal, which has been widely viewed as a “litmus test” for the market’s continuing ability to absorb large global offerings, will conclude its “roadshow” phase Tuesday afternoon.

But rather than a vote of confidence in the market, the Unilever investment “book” at this point is apparently tilted toward the shorter end of the yield curve, the traditional hiding place for “scared money.” And key players have been reluctant to specify the exact timing of its launch and pricing.

After nearly a week, during which they declined to specify the maturities involved, lead underwriters Goldman Sachs, JP Morgan and UBS Warburg revealed Monday the following four-part structure: A two- year floater at about 10 basis points over the three- month London Interbank Offered Rate (LIBOR) and three fixed-rate tranches: A three- year fixed note at about 100 to 105 basis points over Treasuries, a five- year note at 120 to 125 points over Treasuries and a 10-year note in the area of 155 points over Treasuries.

While the deal was notable for the absence of any tranche looking farther out than 10 years, underwriters were quick to point out as of Monday afternoon that “things are going well” and that demand was “evenly spread across the board” among the maturities.

But Tuesday proved another volatile session, with the stock market tanking and Treasuries rallying. As if bond investors didn’t have enough to worry about in terms of overseas developments, this morning saw the circulation of comments by PIMCO’s Bill Gross, the influential bond portfolio fund manager, advising against holding corporate bonds.

“The PIMCO thing did cause some selling,” says one chief of syndication at a New York City primary dealer. “But with things as bad as they have been, it was only a blip on the screen.”

In any case, Tuesday saw investment grade bonds definitely underperform once again versus Treasuries, with the typical spread between the two wider by around five to 10 basis points.

While a source at one of the underwriters had earlier acknowledged the possibility the deal would be pulled if spreads continued to vary by more than ‘six or seven” basis points, this talk has evaporated for now.

But some of the same players are now saying that the issue may not price until Thursday, and that in any case the bulk of the money will be going into the two-year floater and the three-year fixed-rate tranches.

“I don’t think they will be able to keep things as evenly weighted as they had hoped,” says one syndicate member.

The deal is also being hurt by the recent tendency of issuers such as telecoms to score big with bond offerings by selling the securities on the cheap. “Any new deal that’s coming will have to look cheap and these don’t look particularly cheap at this point,” says the syndicate member.

Unilever, an Anglo-Dutch food industry giant, is borrowing the money to pay in part for its $24 billion acquisition of Bestfoods. A debt shelf the firm filed with the SEC on Sept. 25 would have allowed it to borrow up to $15 billion.