Imperial Brands hit the US bond market on Wednesday with a rare offering from the tobacco sector, which has underperformed the broader market amid concerns about geopolitical and regulatory headwinds.
The British tobacco company launched a US$1bn long five-year senior unsecured note offering at US Treasuries plus 320bp, seeing 30bp of price progression from initial marketing. At those levels, the new notes are set to become the highest coupon bond in its US dollar debt stack. BofA Securities, HSBC, Mizuho, Standard Chartered and Wells Fargo are arranging the offering.
The capital raise is expected to fund a tender offer for its outstanding US$1bn 3.5% 2023 senior notes.
Imperial Brands has been an infrequent issuer in the US corporate bond market, having last made a trip in the middle of 2019. In fact, issuance from tobacco companies has been limited this year, with British American Tobacco the last to print a US dollar bond in March.
After the offering's announcement, Imperial Brands' 3.5% 2026 senior notes widened to a spread of 235bp over Treasuries on Wednesday, from 207bp over on Tuesday, according to MarketAxess.
Rated Baa3/BBB, the new offering has an annual coupon step-up of 1.25% if either Moody's or S&P lowers its senior unsecured credit rating to below investment grade.
Imperial Brands is coming with a new bond deal as the broader tobacco industry faces worries around a potential FDA ban on menthol cigarettes in the US. In addition, many multinational tobacco producers have unwound their businesses in Russia, one of the world's largest cigarette markets.
Tobacco issuers have underperformed the broader investment-grade corporate bond index by around 75bp this month, according to ICE BofA data.
"The investor base for that industry is declining and, as such, it makes sense that when you have fewer buyers that will make the funding costs more expensive over time. And that's a negative technical for credit performance as well," said a portfolio manager.
She, however, noted that US bond buyers in general had less restrictions on owning tobacco-related bonds in their portfolios compared to European investors.
Imperial Brands has been focusing on reducing its leverage, cutting down its net debt by £1.2bn to £9.2bn, according to a May 17 earnings call.