A thirsty junk bond market soaked up Dr. Pepper Co.'s much-anticipated $200 million offering, despite what some called "rich" pricing.
The deal contained fixed- and floating-rate tranches totaling $200 million. The fixed-rate portion consisted of $150 million of senior secured notes, due 1996. The notes were priced at par to yield 11.50%, or 425 basis points over comparable Treasuries. Moody's Investors Service assigned the offering a B3 rating, while Standard & Poor's Corp. gave it a B. BT Securities Corp., a Banker's Trust Corp. affiliate, managed the deal.
Pricing on the privately placed floating rate note piece, also due in 1996, was undisclosed. Reports of pricing at 350 basis points over the London Interbank Offered Rate were incorrect, a BT spokesman said. Also included in the deal was $50 million of preferred stock priced at 13 3/4%.
Duff & Phelps/MCM analyst Sheila O'Connell said the deal's "rich" pricing can be attributed to strong covenants surrounding the bonds and the market's virtual lack of new paper.
Dr. Pepper "is very lucky to get this type of rate," she said. "We think it's way too rich compared to where this company is" businesswise.
Kingman Penniman, senior vice president at Duff & Phelps/MCM, said the market wants new paper to replace paper being taken out by corporations seeking lower-cost financing to retire higher-cost debt. Mr. Penniman cited Duracell International Inc. as one example.
Martin S. Fridson, Merrill Lynch & Co.'s head of high-yield research, cautioned about making too much of what was thought to be a low yield on Dr. Pepper's deal.
"I think there is some legitimate concern about buying bonds at appropriate values, but it would be overstating the case to say that bond investors have become totally indifferent to credit quality," Mr. Fridson said.
Harcourt Brace Jovanovich Inc.'s bonds warrant watching, one West Coast trader said. The bonds rose approximately four points Tuesday, and trading in the company's stock was suspended yesterday morning, he said. The company said it would make an important announcement at the at the end of the day yesterday. Late yesterday afternoon, no announcement had yet been made.
At mid-afternoon yesterday, the high-yield market was up approximately 1/2 point, in reaction to promising news from the Soviet Union, Mr. Penniman said.
"The traders are busy," he added.
In the investment-grade market, seasonal sluggishness combined with the Soviet and Salomon sagas made for another quiet session, traders said yesterday.
"There really hasn't been much activity," one said. 'Most of the activity has been in the government market." The market was unchanged, another trader said.
Among yesterday's new issues was United Airlines Inc., which issued $250 million of non-callable debentures, due in 2021. The 9 3/4% debentures were priced at 98.50 to yield 9.906% or 185 basis points over comparable Treasuries.
The debentures are expected to be rated Baa2 by Moody's Investors Service Inc. and BBB by Standard and Poor's Corp. Salomon Brothers managed the transaction.
Pricing on the deal was thought to be rich, "about eight basis points too rich," one trader said.
Commercial Credit Co. issued $150 million of non-callable notes priced at par to yield 7.70% or 75 basis points over interpolated three- to five-year Treasuries. Lehman Brothers managed the deal. Moody's gave the offering an A2 rating, while Standard & Poor's assigned an A.
The Federal Home Loan Mortgage Corp. issued $200 million of callable notes priced at par to yield 7.94% or 33 basis points over Treasuries. Merrill Lynch & Co. managed the offering.
Also yesterday, two money center banks filed shelf registrations with the Securities and Exchange Commission. Citicorp filed for up to $1.5 billion of notes, warrants to purchase notes, and currency warrants.
