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United Technologies Prices $9.8 Billion Bond Deal To Fund Acquisition

05/24/2012 | 07:16pm US/Eastern
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--United Technologies sells largest corporate bond deal in three years

--Orders for the deal set new record, says underwriter

--Investors encouraged by wide spreads in low-yield environment

(Adds spreads data in 10th paragraph, underwriter commentary in 13th-15th paragraphs, amends location of buy-side firm in 17th paragraph.)

   By Patrick McGee 
   Of  
 

United Technologies Corp. (>> United Technologies Corporation) took advantage of low interest rates and sold a $9.8 billion bond deal Thursday, easily the largest U.S. corporate-bond offering in more than three years.

Proceeds from the colossal six-part deal will help the aircraft-to-air conditioner conglomerate finance its $16.5 billion takeover of aerospace parts maker Goodrich Corp. (>> Goodrich Corporation). The Goodrich acquisition is expected to close by late July, even as European regulators investigate the deal over antitrust concerns.

"It's nice to see somebody coming to market and giving us a little bit of hope that the economy is going to expand," said Mary Talbutt-Glassberg, fixed-income portfolio manager and trader at Davidson Trust Company. "They wouldn't be doing this deal if they thought everything would be stagnant for the next five or 10 years."

Talbutt-Glassberg said her firm, which has $1.3 billion of assets under management, had placed a $1 million order for the five-year tranche.

The massive deal--the largest in the U.S. since J.P. Morgan Chase & Co. (JPM) sold a $10 billion bundle of bonds in February 2009, according to data provider Dealogic--comes just days after the corporate bond market endured its worst week of 2012.

Corporate bond yields jumped 0.10 percentage point to 3.39%, according to the Barclays U.S. corporate investment-grade index. And spreads, the risk premium demanded by investors over the safe-haven Treasurys, have climbed 0.24 point this month to 2.10 points.

"The new-issue market was for all intents and purposes closed last week given the volatility," said Tom Murphy at Columbia Management. Indeed, just $9.6 billion of new corporate bonds entered the market last week, a five-week low.

But corporate bonds improved each day this week, sending yields lower and making it more enticing to get a mega-sized deal done. As one banker said: When was the last time an issuer had the chance to sell $10 billion with the 10-year Treasury rate below 1.80%?

Despite overall low yields, investors were enthused about the deal given how much extra yield was baked in. Thanks to the recent market sell-off, the spread on United Technologies' 30-year bonds jumped 0.40 percentage point this month, according to MarketAxess, and Thursday's deal offered an additional 0.20 point in "concession"--the extra yield offered on new bonds--making it more attractive.

The spread on the 30-year bonds, which accounted for $3.5 billion of the deal, was 1.73 percentage points over comparable Treasurys.

The bond deal consisted of $8.3 billion in fixed-rate bonds maturing in three-, five-, 10- and 30-years. They were priced at yields of 1.219%, 1.818%, 3.109%, and 4.576%, respectively.

It also included $1.5 billion of 18-month and three-year floating-rate notes, priced at 0.27 and 0.50 percentage point over the London interbank offered rate, or Libor.

Orders totaled between $35 billion and $38 billion, the largest order book ever in records maintained by Bank of America Merrill Lynch, which led the transaction.

BofA Merrill was a bookrunner on the two largest corporate bonds deal of the past decade: the $16.5 billion offering from Roche Holding AG (RHHBY, ROG.VX, RO.EB) in February 2009, and the Pfizer Inc. (PFE) $13.5 billion deal in March 2009. Both of those had order books at less than $30 billion, said Andrew Karp, BofA Merrill's head of U.S. investment-grade syndicate.

"There were clearly investors waiting for this transaction who had positioned themselves for it," he added.

The more orders there are, the less investors can expect to receive when the deal is allocated.

"We've been told that allocations will be brutal," said John Majoros, managing director at Wasmer, Schroeder & Co., a Naples, Fla.-based firm with $4.3 billion under management.

Majoros said Wasmer ordered more bonds from this deal than any other this year, though he declined to say how much that was. He expected to receive less than one-third the volume that he put in for.

The large number of orders also means the bonds should continue to trade well in the secondary market as disappointed investors try to fill up their portfolios.

"These spreads are going to come in so fast," Talbutt-Glassberg said.

She said the yields were comparable to bonds in the financial sector, where investors demand more risk-compensation.

Five-year bonds from International Business Machines Corp. (>> International Business Machines Corp.), for instance, last traded at a yield of just 1.336%, or 0.48 percentage point lower than what United Technologies offered.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

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