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For what was supposed to be a quiet finish to the week before Friday's early bond market close preceding the Memorial Day holiday, the one corporate bond deal that was printed Thursday proved noteworthy. United Technologies (NYSE:UTX), a multinational manufacturer producing products as diverse as Carrier air conditioners, Pratt & Whitney engines, Otis elevators, and Black Hawk helicopters, issued $9.8 billion of bonds to finance the company's $16.5 billion purchase of Goodrich. The six-part deal featured four fixed rate tranches consisting of $1 billion of three-year notes at a credit spread of 80 basis points, $1.5 billion of five-year notes at a spread of 105 basis points, $2.3 billion of ten-year notes at a spread of 135 basis points, and $3.5 billion of thirty-year notes at a spread of 173 basis points over comparable maturity Treasury securities. The company also sold two floating rate tranches with the eighteen month and three year tranches pricing at 27 and 50 basis points over LIBOR respectively.

The UTX deal, the largest corporate bond deal in three years, was the most demanded corporate bond deal in history, generating approximately $35 billion of investor interest for the $9.8 billion of securities. Despite the fact that UTX was able to finance this transformative debt-fueled transaction at 140 basis points less than its most recently issued ten-year note, institutional bond investors bid the securities in record numbers. Below is where today's deal ranked among the largest bond deals on record:

  1. Roche issued $16.5 billion of bonds on 3/17/09 as part of its $42 billion purchase of Genentech;
  2. France Telecom (FTE) issued a multi-currency deal on 3/7/01 equivalent to a USD size of $16.32 ($9bn of the deal was priced in dollars) to refinance its 60bn euros of debt accumulated to build its international network;
  3. Deutsche Telekom (DT) issued a multi-currency deal on 6/28/00 equivalent to a USD size of $14.54bn ($9.5bn of the deal was priced in dollars);
  4. Pfizer (NYSE:PFE) issued $13.5bn of bonds on 2/18/09 as part of its $68 billion purchase of Wyeth;
  5. Worldcom, the now defunct telecommunications company, issued $11.9 billion of securities on 5/9/01 and declared bankruptcy just fourteen months later;
  6. United Technologies issued $9.8bn of bonds Thursday to fund part of its purchase of Goodrich;
  7. Kraft (KFT) issued $9.5bn of bonds on 2/4/10 to fund part of its purchase of Cadbury;
  8. Ford (NYSE:F) issued $9.4 billion of debt on 10/22/2001 just two years after an $8.6 billion issue;
  9. GlaxoSmithKline (NYSE:GSK) issued $9 billion of bonds on 5/6/08 to finance a large scale share repurchase plan;
  10. General Electric Capital Corporation (NYSE:GE) issued $8.5 billion of bonds on 4/16/08 as part of a capital raise for its finance company after the Bear Stearns takeover by J.P. Morgan & Chase (NYSE:JPM).

Source: Thomson Reuters, Bloomberg, Citigroup

While there have been a handful of larger bond deals, none have ever seen the oversubscription of today's issue. Newly issued UTX thirty-year bonds ended the day with credit spreads roughly twenty tighter as excess demand saw investors who did not get their intended allocation bid up bond prices in the secondary market across the curve. The coupon on the 30-yr tranche fares remarkably attractive to other large bond deals. The Roche 30-yr priced at 7%. The France Telecom and Deutsche Telekom featured coupon steps in addition to their attractive initial coupons of 8.5% and 8.25%.

Investment grade corporate credit spreads have been leaking wider over the past month given the continued uncertainty emanating out of Europe. The UTX deal showed that a strong company can bring a seemingly unlimited quantity of bonds, and see them absorbed by an investor base abounding with excess liquidity. The strong interest in this deal and the very low all-in financing cost could spur speculation of large scale mergers and acquisitions, potentially providing a stock market catalyst. As the recent Treasury rally lowers corporate financing costs, blue chip companies like UTX (rated A2/A/A+) are increasingly seeing their earnings yields rise relative to their financing yields which could spur debt financed share repurchases in addition to the increased odds of widespread M&A.

Source: UTX Deal Marks Historic Day In Bond Market