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Glaxo taps furious demand as US buyers lap up $2.5bn

GlaxoSmithKline this week provided the fix of high grade corporate credit US bond investors have been desperate for all year when it launched a blow-out $2.5bn three tranche global deal, its first ever issue in the dollar market.

The UK pharmaceutical company's deal ? along with a $500m seven year by Diageo and an $800m 10 year by Swiss-based commodities group Glencore ? tapped into a market crying out for something other than bonds from the financial sector.

GSK has been monitoring the market for some time, and timed its debut perfectly to take advantage of tight spreads with interest rates at historical lows.

The Aa2/AA rated company structured its transaction to be as attractive as possible to the broadest array of investors. In so doing, it achieved pricing as good as anything available to it in sterling or euros.

"This is something the market has been starving for," said Jim Merli, global head of fixed income syndicate at Lehman Brothers, which led the deal with Citigroup and JP Morgan. "It's an entirely new name offering high quality industrial bonds in liquid tranches of three, 10 and 30 years."

The deal was launched as a $500m three year with guidance in the 40bp area over Treasuries, a $1.5bn 10 year in the 60bp area and a $500m 30 year with guidance in the 70bp area.

Normally an issuer will hit a wall of resistance from US investors if it couples low Treasury yields with tight launch spreads. In this case, coupons were pitifully low, at 2.37% on the three year and 4.375% and 5.375% on the 10 and 30 year tranches.

But with virtually everything else in the US bond market trading so tightly, the quality of the Glaxo name makes it at least a defensive play, at a time when the market is still unsure when the Fed will change monetary policy.

With about 300 investors putting in almost $6bn of orders, GSK was able to tighten its already aggressive guidance levels.

"The pricing speaks for itself," said a banker at one of the leads. "With the three year priced at 40bp, the 10 year at 58bp and the 30 year at 68bp, the deal resulted in spectacular levels for the company."

GSK has created an instant dollar yield curve at spreads inside those of blue-chip brand names such as WalMart (Aa2/AA), which trades around the 60bp area in 10 years.

More importantly for GlaxoSmithKline, the dollar deal's pricing was competitive with its levels in its home markets.

"This deal gave GSK great pricing, relative to what it could get in euros or sterling," said a banker in London. "If it were to issue a five year in Europe it would pay something in the high single digits over swaps.

"GSK did this three year dollar deal at the equivalent of about 1bp to 2bp over Libor and the 10 year just inside Libor plus 20bp, so that's attractive."

The spread difference between GSK's 10 year and 30 year is also extraordinarily flat, with only a 10bp difference between the two, when the usual curve between 10 and 30 years for US industrials is around 15bp-20bp.

The flatness is explained by the 10 year tranche's greater size and also because there is a strong bid for the duration that a 30 year bond offers.

Although the deal was an opportunistic one, it was also a strategic move on GSK's part to develop a yield curve in dollars.

While triple-A rated pharmaceutical companies such as Pfizer have next to no debt because they are cash rich, GSK has net debt of $1.6bn on its balance sheet and has used free cashflow over the last few years to repurchase shares.

GSK prefers to have strong and stable double-A ratings, rather than triple-A. It argues the negative impact of being downgraded from triple-A would outweigh any positive impact to be gained by an upgrade to the top level. 

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