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Thursday was a big day in the corporate bond market. The secondary market printed nearly $19 billion in trades, but that wasn't the big news. The action occurred in the new issue market, namely United Technologies (NYSE:UTX) printing a $9.8 billion dollar bond offering. The deal is the largest deal that has printed since the credit crisis began and roughly equal to the amount of debt United Technologies has outstanding.

The offering consisted of:

  • $1,000,000,000 1.20% NOTES DUE 2015 (+80bps 1.219% YTM),
  • $1,500,000,000 1.80% NOTES DUE 2017 (+105bps, 1.82% YTM),
  • $2,300,000,000 3.10% NOTES DUE 2022 (+135bps, 3.11% YTM),
  • $3,500,000,000 4.50% NOTES DUE 2042 (+173bps, 4.58% YTM), and
  • $1,500,000,000 18mo and three year floaters at LIBOR +27bps and 50bps respectively.

There were over $35 billion in orders for the deal, so allocations are going to be harsh. $35 billion is one of the largest order books ever, it is just staggering. One thing that must be realized, however, is that the order book is not truly reflective of the actual demand for the bonds. When a deal is going well, institutions will "pad" their order (put in an order for more than they really want so when the cut-backs come, they might end up near what they really want), making the order book monstrous.

The mega-deal is the result of UTC's planned acquisition of Goodrich Corp (NYSE:GR) for $16.5 billion (approximately 2x revenues). Goodrich is one of the largest worldwide suppliers of aerospace components, systems and services to the commercial and general aviation airplane markets. Goodrich is also a leading supplier of systems and products to the global defense and space markets. Once the Acquisition is complete, it is expected that Goodrich and Hamilton Sundstrand will be combined to form a new segment named UTC Aerospace Systems.

The remainder of the purchase price will be funded with:

  • borrowings to be made under the $2 billion term loan credit agreement
  • borrowings to be made through certain commercial paper issuances,
  • the issuance of certain other securities.

These amounts may change (i.e. CP paydowns...) with the use of up to $3 billion in cash and other non-core asset sales.

Deal Terms:

RankingSenior Unsecured
RatingsA2/ A/ A (N/ N/ S)
Special Mandatory RedemptionIf the acquisition is not completed on or prior to3/25/13, or if the Merger Agreement is terminated prior to that date, UTC must redeem all of the notes at a redemption price equal to 101%
IndentureMay 1, 2001

Because this is an older indenture (the foundation document upon which the notes terms are based), covenants are light. The covenants in the deal consist or:

  • Merger, consolidation, sale of assets - Prohibited unless there is no event of default, the successor assumes the obligation and UTC delivers an opinion that the conditions have been met. Toothless covenant in my opinion.
  • Equally and ratably secured - if any principal property of UTC or one of their domestic manufacturing subsidiaries become subject of a lien, the debt will be equally and ratably secured. Up to 10% of consolidated net tangible assets can be excluded.

Typical investment grade covenants - all bark, no bite. Not even a token 101% change of control provision. It pays to be "A" rated and well thought of.

Bottom Line: These bonds will perform well. An investor will not get "facebooked" (NASDAQ:FB) on this deal due to the concession to (wider spread than) existing debt and the demand for bonds when it frees to trade. Investors will be looking to top up their positions (after a tough allocation) and add to the name as it will be a liquid issue from a higher rated issuer. As well, the debt is coming cheap to where "A" rated credits trade both in the aerospace/defense space and credit generally.

Documents:

Term sheet

Prospectus

Source: United Technologies - The 2012 Mega Deal

Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.