Attractive terms for Viacom’s hybrid bonds have helped rope in a slew of investors. The opportunity cost of not investing in them is too high for investors; they have all piled into Viacom’s bond offering.
Although investors lapped up US media giant Viacom’s bond issue, it however had to tweak the terms of the instrument so as to reflect the reforms taking place in the US tax code.
As per a filing with the SEC, initially, the bond included a tax event call option which allowed Viacom to buyback the instrument at par in the event tax law underwent change. However, when the bond was officially announced, the redemption price was raised to 101.
Investors have demanded more compensation than the norm in the call option.
“It was a pretty big sticking point,” said Matt Brill, a portfolio manager at Invesco. “Investors would have liked 102 or even 103. But given the thirst for yield, the issuer didn’t have to go above 101.”
Booking for the deal, which Morgan Stanley and Bank of America Merrill Lynch began marketing on Tuesday have swelled to more than $10 billion by noon, which only goes to prove that the tweaks helped rope in more investors by alleviating their concerns.
Reforms in U.S. Tax Law
Over the course of the last few weeks, tax reform has been a big talking point in the corporate bond market with expectations of a significant overhaul under President Trump.
Trump’s Treasury Secretary, Steven Mnuchin, has stated on Thursday that he wanted to see a “very significant” tax reform through, before Congress takes its August break.
Proposals which could impact the cost of debt for issuers, include the removal of the tax-deductible status of interest payments as well as changes to the rules on repatriation, all of which could significantly affect the cost of debt for issuers.
Traditionally, issuers of hybrid bonds typically include language which allows the issuers to redeem the instrument at par and include the accrued interest in the event tax rules undergo change. However, with investors becoming more sensitive to such clauses, the potential for them to undergo reform under Trump is higher.
Sources from issuers have made it clear that they would demand higher premiums if such language is used in future bond sales. However, a strong demand for corporate bonds signify limited purchasing power by investors.
“The bottom line is investors want deals, and this is a significant yield for a non-financial company,” said Brill. “In this market, with yields as they are, there is not much negotiating power from buyers at the moment.”
Viacom’s bonds have been rated Ba1/BB/BB+.