International Paper Prices $1.6B Notes - Analyst Blog

International Paper Company ( IP ) 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 purposes.

Moody's Ratings

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.

Interest Outlay

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 Bloomberg 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. ( AEM ), Kumba Iron Ore Ltd. ( KIROY ) and Compass Minerals International Inc. ( CMP ), all of which sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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