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Derivatives

Spreads Tighten On Forest Product Co. After Bond Sale

Five-year credit protection on Weyerhaeuser tightened 20 basis points after the company's USD5.5 billion bond issue was oversubscribed Wednesday. It was the largest corporate bond offering this year and resulted in spreads moving in from 130bps on Wednesday morning to about 110bps by the market close. Spreads on the Tacoma, Wash.-based company were at 125bps a week prior to the bond offering.

"Spreads started tightening almost immediately following the sale. Investors were going nuts for this offering. It was well oversubscribed," said one credit-default swap trader in New York. The bond sale was broken down into USD500 million of 18-month floating-rate notes, USD1 billion each of three-and-five-year notes and USD1.75 billion of 10-year notes and USD1.25 of 30-year notes.

The company, which specializes in the growing and harvesting of timber and the manufacturing and selling of forest products, plans to use the proceeds from the sale to acquire Portland, Ore.-based Willamette Industries, a smaller rival. Weyerhaeuser will use the bond offering to pay off bank debt it assumed through its USD6.2 billion purchase of Willamette.

Fitch Ratings has assigned at triple B minus rating to the offering with a negative outlook. Dennis Ruggles, director at Fitch covering the forest product industry, said the negative outlook is based on Weyerhaeuser's decision not to develop an asset sales plan to leverage the acquisition of Willamette. He added that the company's competitors, such as International Paper, have developed asset sales on the back of their bond issues. "Weyerhaeuser is looking for the markets to bail them out and the markets are not good," Ruggles said.

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