Philip Morris Borrowing Costs Climb After Russia Bans Public Smoking

Source from:  Fox Business  02/28/2013

Bond investors demanded a higher yield from Philip Morris International Inc. (PM) Tuesday than the cigarette maker was granted last summer, as rising interest rates and questions about overseas tobacco sales weighed on its debt sale.

Philip Morris's $1.85 billion deal included fixed-rate bonds due in 10 and 30 years, which yielded 2.833% and 4.292%, respectively, according to a bank. When the tobacco company sold similar bonds last August, it paid fixed rates of 2.50% and 4.014%, according to Standard & Poor's LCD.

One reason is the rise in U.S. Treasury rates, the benchmark for corporate bonds, but another could be the timing. Earlier this week, President Vladimir Putin signed a law to ban smoking in public places across Russia--the No. 2 market for tobacco, after China. The law takes effect in June and could hurt cigarette sales, analysts say.

Bond traders and bankers that arrange new deals say the new law could be a reason why the Philip Morris issue appeared to struggle in the primary market--the deal was launched relatively late in the day, around 2:30 p.m. EST--despite there being little competition from other borrowers.

"These things take a week to put together, and I'm sure nobody had any inkling that Russia would pull anything like this," said Dan Hannis, bond trader at William Blair & Co. He called Philip Morris a strong company with great cash flow, "but I can understand why people would back away right now."

The deal was arranged by Goldman Sachs Group (GS), Societe Generale SA France (SCGLY) and HSBC Securities. Banks wouldn't comment on the deal.

"Since the new law enters into force in June 2013, and some provisions, such as the ban on smoking in restaurants, go into effect in June 2014, it is premature for us to comment on the impact this new law will have," a Philip Morris spokeswoman said. "However, generally, public smoking bans tend to have an initial impact on consumption as adult smokers adjust to the new regulations, but in the longer-term, consumption returns to the trend before the restrictions went into effect."

Philip Morris bonds also weakened in the secondary market, where previously issued bonds trade. The risk premium, or spread, on its 5.65% bonds due 2018 and its 3.875% bonds due 2042 each widened by 0.12 percentage point, indicating investors were seeking higher yield compensation to own the bonds.

On a spreads-to-Treasurys basis, the 10- and 30-year bonds were priced to yield 0.95 and 1.20 percentage points more yield than comparable Treasurys. That's similar to the 0.90 and 1.20 point spreads it paid last August, but the broader market has improved since then. In the Barclays index of corporate bonds, average spreads were 1.36 percentage points on Monday, down from 1.73 points in mid-August.

The Philip Morris bonds are rated A by Moody's Investors Service and A2 by Standard & Poor's Ratings Services.

Proceeds from the bond sale are for working capital, buying back stock and refinancing debts, according to a prospectus with the Securities and Exchange Commission. The company has $2.5 billion of bonds coming due before mid-May, S&P LCD says.

Shares of the tobacco company inched up 0.04% to $91.60 on the New York Stock Exchange, while the broader Standard & Poor's 500 index gained 0.61% to 1496.94.

The deal also included $200 million worth of two-year floating-rate notes. They were sold at 0.05 percentage point over the three-month London interbank offered rate, or Libor, which is currently 0.29%. Enditem