Pep­siCo sparks best bond rally in five months with WBD deal

The Pak Banker - - Company& -

MOSCOW: Pep­siCo Inc.'s ac­qui­si­tion of OAO Wim­mBill-Dann is spurring the biggest bond mar­ket rally for the Rus­sian dairy and juice pro­ducer in at least five months as in­vestors spec­u­late the deal will lead to higher credit rat­ings.

Yields on the Moscow­based com­pany's 2013 ru­ble notes had their biggest two-day de­cline since the bonds were sold in July, fall­ing 54 ba­sis points, or 0.54 per­cent­age point, to 7.6 per­cent by Dec. 3 af­ter the deal was an­nounced the day be­fore. The record-low yields may fall a fur­ther 50 ba­sis points, ac­cord­ing to Re­nais­sance Cap­i­tal and Alfa Bank.

The pur­chase by Pep­siCo, which has bet­ter credit rat­ings than the Rus­sian govern­ment, will cut the ex­tra yield on Wimm-Bill-Dann bonds over sov­er­eign debt known as OFZs to al­most zero from 131 ba­sis points, ac­cord­ing to Maxim Tishin at UFG As­set Man­age­ment. The ac­qui­si­tion will make Rus­sia the largest mar­ket out­side the U.S. for the world's biggest maker of snack foods.

"We ex­pect Wimm-Bil­lDann ru­ble bonds to rally in the next few days," said Dmitry Turmy­shev, a fixed-in­come an­a­lyst at Moscow-based Trust In­vest­ment Bank. "The pos­si­ble ac­qui­si­tion by Pep­siCo def­i­nitely could be a very pos­i­tive event for WBD's credit pro­file."

Wimm-Bill-Dann shares surged 58 per­cent af­ter Pepsi said it will buy a 66 per­cent stake for $3.8 bil­lion and make an of­fer for the rest of the shares.

The deal boosts ex­pec­ta­tions of fur­ther for­eign pur­chases in the food-re­tail in­dus­try, spurring gains for su­per­mar­ket chains X5 Re­tail Group NV and O'Key Group SA, ac­cord­ing to No­mura Hold­ings Inc.

Pep­siCo is rated Aa3 by Moody's In­vestors Ser­vice, four lev­els above Rus­sia's govern­ment, and A by Stan­dard & Poor's, three above the world's biggest en­ergy ex­port­ing nation. The yield on the Pur­chase, New York-based com­pany's dol­lar bonds due in 2020 at 3.66 per­cent on Dec. 3 was 110 ba­sis points be­low sim­i­lar-ma­tu­rity sov­er­eign dol­lar bonds from Rus­sia.

Wimm-Bill-Dann is ranked nine steps lower than Pep­siCo at Ba3 by Moody's and seven steps short by S&P at BB-. S&P said Dec. 3 it raised its out­look to "pos­i­tive" from "sta­ble" af­ter the deal.

"There is a pos­si­bil­ity of a rat­ing in­crease be­cause Pep­siCo will view Wimm-Bil­lDann as its strate­gic as­set and will im­prove its credit qual­ity," An­ton Geyze, an an­a­lyst at S&P in Moscow, said in a phone in­ter­view on Dec. 3.

The deal would be "pos­i­tive" for Wimm-Bill-Dann, said Larissa Loznova, a se­nior an­a­lyst at Moody's in Moscow. "It will pro­vide ac­cess to mar­ket­ing and other sup­port from a larger, more fi­nan­cially re­source­ful global com­pany with a lot of in­dus­try ex­pe­ri­ence, al­though the dairy mar­ket is new for Pep­ciCo."

A rat­ing up­grade may com­press Wimm-Bill-Dann's 2013 bond yields by 50 ba­sis points, Elena Kolchina, who helps man­age $1.5 bil­lion of as­sets as head of fixed-in­come prod­ucts at Re­nais­sance As­set Man­agers in Moscow, said on Dec. 3 by e-mail. The com­pany's yield spread over govern­ment bonds would tighten by about 100 ba­sis points to 40 or 50 over OFZs dur­ing the first stage of the deal, Turmy­shev at Trust said.

Some "10-30 ba­sis points over OFZs would be fair if and when the deal closes," ac­cord­ing to Tishin, who helps man­age $350 mil­lion of debt at UFG As­set Man­age­ment in Moscow.

"Wimm-Bill-Dann's fair yield is con­tin­u­ing to be reval­ued," Eka­te­rina Leonova and Tatyana Tsi­lyurik, an­a­lysts at Moscow-based Alfa Bank, said in an e-mailed note on Dec. 3. "If the com­pany is uni­fied, its debt is ex­pected to be­come first tier, im­ply­ing a yield re­duc­tion of 30-50 ba­sis points."

Rus­sia's dol­lar bonds due in 2020 rose to­day, push­ing the yield down 8 ba­sis points to a two-week low of 4.734 per­cent. The price of coun­try's ru­ble notes due Au­gust 2016 fell, driv­ing the yield 1 ba­sis points higher to 7.33 per­cent at 10:53 a.m. in Moscow.

The ex­tra yield in­vestors de­mand to hold Rus­sian debt rather than U.S. Trea­suries rose 1 ba­sis point to 211, ac­cord­ing to JPMor­gan EMBI+ in­dexes. The dif­fer­ence com­pares with 142 for the debt of sim­i­larly rated Mex­ico and 175 for Brazil, which is rated two steps lower at Baa3 by Moody's.

The yield spread on Rus­sian bonds is 31 ba­sis points be­low the av­er­age for emerg­ing mar­kets, down from a 15-month high of 105 in Fe­bru­ary, ac­cord­ing to JPMor­gan in­dexes.

The cost of pro­tect­ing Rus­sian debt against non-pay­ment for five years us­ing cred­it­de­fault swaps was lit­tle changed at 156 on Dec. 3, down from this year's peak of 217, ac­cord­ing to CMA. The con­tracts pay the buyer face value in ex­change for the un­der­ly­ing se­cu­ri­ties or the cash equiv­a­lent should a govern­ment or com­pany fail to ad­here to its debt agree­ments.

Credit-de­fault swaps for Rus­sia, rated Baa1 by Moody's, its third-low­est in­vest­ment­grade rat­ing, cost 18 ba­sis points more than con­tracts for Turkey, which is rated four lev­els lower at Ba2. Rus­sia swaps cost as much as 40 ba­sis points less on April 20. -Bloomberg

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