Unilever Deal May Fall to Market Volatility

Why the $7 Billion offering could be postponed.
Ed ZwirnOctober 13, 2000

Unilever N.V. may not go through with its $7 billion bond offer unless the bond market calms down, market sources indicate.

Lead underwriters Goldman Sachs, JP Morgan and UBS Warburg started the road show for the deal on Monday, Oct. 9. They are scheduled to wrap up late Tuesday afternoon, Oct. 17. The launch and pricing is scheduled for Wednesday.

The dealers involved have been quick to say things are going well. But they have yet to specify any structure or maturities for the issue or issues involved, even to the road show audiences. They say they prefer to assess demand before getting down to specifics.

Market sources away from the deal see this as a sign of skittishness, not surprising given recent volatility that has seen spreads on investment grade paper swing by as much as 30 basis points over the past several weeks.

The recent market environment has seen jitters emerge from causes as diverse as earnings-driven trouble in equities, and rumored and reported losses sustained by underwriters of junk bonds.

But Thursday was the stuff that nightmares are made of.

Escalating trouble in the Middle East reached a fever pitch Thursday morning, sending both debt and equity markets, which had both opened on the upside, plummeting.

The spread for investment grade 10- year paper had started the session tighter by some 10 to 12 basis points. By late afternoon they were wider by about 7 basis points, making for an intraday swing of up to 19 basis points.

Now a source at one of the lead underwriters is saying privately that discretion may prove the better part of valor in this case.

“If the market for (10-year) investment grade bonds stays within a 6-7 basis point trading range, then they’ll go through with it (the Unilever offering),” he said, adding that the final decision may have to wait until Wednesday.

Unilever, a giant food and soap product manufacturer headquartered in The Netherlands, is borrowing the money in part for its $24 billion acquisition of Bestfoods.

In July, Moody’s cut its senior long- term debt ratings on the company to A1 from triple-A. S&P earlier this month followed suit, downgrading the debt to single-A-plus from triple-A.

Both moves were attributed to the Bestfoods’ acquisition, which was completely funded by debt.

Unilever needs to issue this paper as a long-term substitute for “bridge loans” incurred to finance the transaction.

The success of this deal is widely viewed as a “litmus test” for the corporate bond market’s continuing ability to absorb large global issues.