International Paper Company
) issued $1.6 billion worth of senior unsecured bonds, and
announced a cash tender offer to buy back outstanding debt worth
around $1.0 billion, in a refinancing move designed to capitalize
on a lucrative low-interest rate environment.
The offering consists of $800 million worth of 3.65% 10-year senior
unsecured notes priced at 99.626% and $800 million of 4.80% 30-year
senior unsecured debentures priced at 99.479%. The proceeds from
the issue will primarily be used to fund the buyback of the
company's outstanding debt due 2018 and 2019, valued at about $1.0
billion. Any funds left over will be used for general corporate
International Paper is reaping the benefits of its upgraded credit
rating by Moody's Investor Service. On May 28, the rating agency
raised the company's senior unsecured debt by one notch to Baa2,
citing sustained de-leveraging of its capital structure and strong
free cash flow generation as reasons behind the upgrade. Moody's
has rated its new issuance at par with the company's existing debt,
assigning a Baa2 rating to the $1.6 billion offering.
The rating reflects Moodys' expectations of improved financial and
operating prospects from the company. There are other favorable
characteristics as well, like a geographically diversified business
platform, with vertically integrated operations and a global supply
chain and distribution system.
The recent rating upgrade by Moody's has enabled International
Paper to issue fresh debt at comparatively favorable rates,
allowing it to reduce its cost of capital through replacing its
expensive outstanding debt.
The Federal Reserve's low-interest policy continues to be a key
driving force for the U.S. bond market. The corporate borrowers are
capitalizing on the favorable relative yields, presently at their
lowest level in seven years. International Paper's newly issued
10-year notes have a spread of only 110 basis points (bps) over
comparable Treasury securities, as against a 270 bps spread for
bonds sold in Nov 2011.
According to an analyst estimate in a
report, International Paper can save at least $100 million in
annual interest outlay from a complete refinancing of its notes
maturing in 2018 and 2019.
International Paper currently holds a Zacks Rank #3 (Hold). Other
better-ranked stocks in the Basic Materials sector include
Agnico Eagle Mines Ltd.
Kumba Iron Ore Ltd.
Compass Minerals International Inc.
), all of which sport a Zacks Rank #1 (Strong Buy).
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