Investors Set To Attack Issuance From Mars

By Steven Levine

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Iconic U.S. confectionery company Mars, Inc. entered the investment-grade primary market Tuesday to sell a multi-part bond, as it aims to refinance existing debt following a string of recent tie-ups.

The McClean, Virginia-based owner of popular brands, including M&Ms, Milky Way, Snickers, and Twix, as well as Uncle Ben’s, Pedigree and Whiskas pet foods, was poised to price an eight-part note in a private placement, amid a recent decline in U.S. interest rates.

The yield on the 10-year U.S. Treasury note was last hovering at around 2.43% after the Federal Reserve’s latest monetary policy meeting recently struck a more-than-dovish tone with market participants.

The Fed’s decision to maintain the target range for the federal funds rate at 2.25-2.5%, with no plans in 2019 to hike interest rates further, as well as cease other quantitative tightening measures, spurred a plunge in government bond yields, which effectively helped to reignite a decent degree of risk appetite amid lower borrowing costs.

Against this backdrop, Mars said it intends to use the net proceeds from its bond sale in large part to repay all its existing short-term term loan debt, as well as part of what it has drawn-down under its revolving credit facility. Any remaining proceeds will be used for general corporate purposes.

The family-run business, which has survived for over a century, has offered the inaugural note deal to qualified institutional buyers, under the SEC’s Rule 144A and Regulation S. The transaction carries a guaranty by Wm. Wrigley Jr. Company and New Uno Holdings Corporation.

Mars’ debut debt issuance, which could comprise tranches with maturities between six years and 35 years, was set to price Tuesday alongside a handful of other issuers, including Canadian Imperial Bank of Commerce and NatWest Markets, the investment banking arm of the Royal Bank of Scotland.

Demand remains ripe

Mars’ debt transaction could meet with decent demand, as bond investors’ general hunger for yield has faced little easing over at least the past decade, prompting a massive spike in the volume of U.S. dollar-denominated corporate bonds.

Indeed, high-grade corporate debt continues to attract global demand for the yield offered in the primary market – especially among those bond buyers who have been priced out of their local markets or have a dearth of available paper.

The yields on 10-year Japanese and German government bonds, for example, were last in the areas of -0.075% and -0.016%, respectively.

Fund flows also continue to swell.

For the week ended March 20, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$5.14bn into investment-grade corporate bond funds, while high yield funds posted net inflows of nearly US$1.8bn. These figures followed a whopping total of roughly US$9.2bn of inflows into high-grade corporate funds over the past three weeks.

Credit profile stability

Meanwhile, Moody's Investors Service attached a first-time ‘A1’ rating to Mars’ deal, reflecting the company’s “very strong credit profile,” with more than US$37bn of sales across a diversified global portfolio that includes global confectionery (gum, mint and chocolate), pet food, pet health care and other food businesses.

Moody’s analyst Linda Montag noted that although Mars has increased financial leverage in the past to make acquisitions, the company is committed to maintaining an investment-grade profile.

Moody's expects that the firm will target 2x net debt/EBITDA over the long run, while gross debt to EBITDA leverage, currently in the area of mid-3x, is anticipated to fall to about 3x by year-end 2019.

The ratings agency thinks Mars will continue to pursue other acquisitions, particularly in the pet health and services business over the next several years.

Among its recent merger activity, Mars Petcare, for instance, said in late November 2018 that it completed its purchase of AniCura, a family of European animal hospitals and clinics, after receiving antitrust clearance from the European Commission.

Upon closing, AniCura joined Mars Petcare’s portfolio of veterinary care businesses alongside Banfield, BluePearl, Pet Partners, VCA and Linnaeus. As part of its growth strategy, Mars said its newly acquired unit will continue to pursue the expansion of its brand in Europe.

Mars merger appetite may be traced at least to its mega-purchase of The Wm. Wrigley Jr. Company over a decade ago.

In April 2008, Mars had consumed Wrigley – a public company which had been in operation since the late 19th Century – for around US$23bn. As a result of the transaction, Wrigley had become a private company, and the merged entity’s product portfolio mushroomed to include Orbit, Extra, and Doublemint gum brands.

In the meantime, given the ongoing, low rate environment, the Fed’s dovish policy stance, and continued investor appetite for high-quality corporate debt, the U.S. investment-grade primary market is likely to continue to churn out deals.

Syndicate managers generally expect a total of around US$119.5bn worth of new U.S. dollar-denominated corporate bonds in March (of which more than 75.5% has priced) while, to date in 2019, issuers sold a little more than US$307bn, according to figures compiled by Ron Quigley, head of fixed income syndicate at Mischler Financial.

Quigley furthermore observed at least 20 potential deals in the pipeline, including from Walgreens Boots Alliance (Nasdaq: WBA), Macy’s (NYSE: M), Microsoft (Nasdaq: MSFT) and Apple (Nasdaq: AAPL) – each of which recently registered debt securities-related automatic shelf filings with the SEC.