Apple's (AAPL) (AA-, narrow moat) record-setting $17 billion bond offering was well received by the market, and based on trading in the secondary markets after the deal was launched, it appears to have been priced with exceptionally little new issue concession, especially considering the size of the offering. For example, the firm's 10-year bonds were priced at 75 basis points over Treasuries, but traded only 2-3 basis points tighter in the secondary market.
In our new issue note published before the bond offering was priced, we noted that price talk compared reasonably well with other similar-rated large technology firms. But the new issue tightened 15-20 basis points versus price talk, leaving it not particularly compelling, in our view. For similar credit risk in the technology sector, we prefer Intel's (INTC) (AA, wide moat) 10-year bonds, which are trading about 30 basis points wider than Apple's. We recently added Intel's bonds to our Best Ideas list as its credit spreads have widened out due to investor concerns about depressed demand for PCs. However, based on the firm's massive scale in the semiconductor market, we expect the firm will leverage its ability to produce more-powerful chips at a lower cost than its competitors and develop new products that consume less energy to address the needs of the smartphone and tablet market.
More important, Apple's bond issue indicates to us that the depth of demand for corporate bonds could very well support megasize strategic mergers that were unthinkable only a few months ago. For example, we recently published a report analyzing the potential impact if PepsiCo (PEP) (AA-, wide moat) were to purchase Mondelez International (MDLZ) (rating: BBB, wide moat). In our base-case scenario, we estimate that Pepsi could pay about half in stock and half in debt and create substantial shareholder value. However, such a transaction would significantly increase debt leverage to around 4 times at the combined entity, leading to a multinotch downgrade in Pepsi's rating. We estimate that Pepsi could shake out around BBB and its existing 10-year bonds could lose as much as 7% of their value. Based on the amount of equity value that we believe could be created through the merger of these companies and Pepsi's acknowledgement that it has been discussing strategic alternatives to drive shareholder growth, we have changed our recommendation on the firm's bonds to underweight until further clarity arises as to Pepsi's intentions.
The credit market is currently pricing in a Goldilocks economy--not too hot to curtail central bank largesse, not too cool to slip into recession. Retail data have been softening and the ISM Manufacturing Index declined, prompting concern that the spring slump was returning, but the low level of unemployment and payroll gains assuaged those fears. So long as GDP growth remains in this 2%-2.5% range, issuers can continue to expand their free cash flow margins, the Fed appears to be willing to remain accommodative, and the debt markets have been open to refinance maturing debt, thus keeping default rates at their currently very low levels. The Morningstar Corporate Bond Index tightened 2 basis points last week to +135, with all of the tightening occurring Friday after the payroll number was released. In the high-yield market, the spread of Bank of America Merrill Lynch's US High Yield Index has dropped to below +400, about half of where it peaked in the fall of 2011 and the lowest spread since early 2011. In the bank loan market, term loans have been continually repriced lower this year, and the average spread within this asset class has declined about 30 basis points.
ECB Joins the Central Bank Easing Party
As economic indicators within the eurozone continued to weaken and inflation dropped to 1.2% in April from 1.7%, the European Central Bank finally relented and joined the central bank easing party. It reduced its main lending rate to banks to 0.50% from 0.75% and indicated it was contemplating additional measures such as purchasing pools of small-business loans in an attempt to spur economic growth. Risk assets responded in kind, as European equity markets rose, corporate credit spreads tightened, and peripheral eurozone sovereign bonds rose. For example, the average spread of Morningstar's Eurobond Index tightened 6 basis points to +120, its lowest level since November 2010. In addition, after dipping below 4% the prior week, the yield on Italy's 10-year bonds continued to rip tighter and reached 3.82%--its lowest since October 2010. Spanish 10-year bonds also rallied, driving those bond yields down to 4.04%--also the lowest since October 2010. These lower yields and tighter credit spreads are in stark contrast to the weakening underlying economic indicators for Spain and Italy as well as the eurozone as a whole.
Click here to see our summary of recent movements among credit risk indicators.
New Issue Notes
We Continue to View IBM as Too Rich (May 2)
International Business Machines (IBM) (AA-, wide moat) intends to issue 3- and 7-year notes with initial price talk around 30 and 70 basis points over Treasuries, respectively. These levels would provide a slight discount to the firm's existing notes, if initial price talk holds. Its 2.0% notes due in 2016 have traded in the +25-35 basis points range over the past couple days, which we believe is fair given the short duration and IBM's exceptionally strong credit profile. The 7-year notes would provide a decent concession versus IBM's 1.875% notes due in 2019, which have traded around +50 basis points. The firm's 2.9% notes due in 2021 have been trading around +70 basis points, which makes the initial price talk on the 7-year notes seem too wide. We continue to see better value across the tech industry versus IBM's longer-dated bonds. Cisco Systems' (CSCO) (AA, wide moat) 4.45% notes due in 2020, comparable in maturity to the new IBM 7-year issue, trade around the +82 basis points mark. Intel is our favorite among large tech firms. Intel's 2.7% notes due in 2022 currently trade at a spread of about +107 basis points.
United Continental Holdings Tapping High-Yield Market with Rare Senior Unsecured Offering (May 2)
As an indicator of both the strength in the high-yield market and the improved overall outlook for the domestic airline industry, United Continental Holdings (UAL) (B, no moat) is in the market with a $300 million senior unsecured 5-year noncallable note. Among the legacy domestic carriers, the vast preponderance of issuance over the past several years has been secured paper--which provides downside protection--or senior unsecured convertible bonds--which provide upside related to the stock. Investing in this type of paper is not for the faint of heart, and we strongly prefer investing in secured paper in this industry. Investors should generally be prepared to trade in and out of senior unsecured notes depending on underlying fundamentals. However, more broadly speaking some of the foreign carriers which carry investment-grade ratings and even domestic Southwest Airlines (LUV) (BBB-, no moat) occasionally tap the unsecured debt markets. United's new offering will be issued at the holding company level with a guarantee by operating subsidiary United Airlines, Inc. The notes will be deeply subordinated in the capital structure. The offering memorandum lists $1.7 billion of pro forma total debt (all unsecured) at the holding company but $12.4 billion consolidated debt of which $10.2 billion is secured. As such, in our view this should be priced like a solid CCC credit. Getting to a fair pricing level is more challenging. Looking at CCC index levels provides a starting point, and Merrill Lynch's index is indicated at 8.7%. The Merrill Lynch High Yield Index, which is more in line with our B issuer rating, offers a yield of 5.3%.
Navistar International's (NAV) (B-, no moat) senior unsecured notes, which are subordinated to secured bank debt, have rallied sharply recently to trade at around 7%, which we now view as moderately rich. Ultimately, given our favorable outlook but considering the deep subordination and historical volatility of the industry (note that we have an extreme equity uncertainty rating, which is built into our Business Risk pillar), we see fair value in the 7.5%-8.0% range. In our coverage space, Southwest has the only relevant unsecured bonds and the firm's 2017 maturity bonds trade at a spread of 150 basis points over Treasuries, which is rich in our view but arguably in line with its weak investment-grade ratings.
The airline industry has a storied past, including a steady flow of companies filing through the bankruptcy courts, providing a clear level of caution when investing in senior unsecured debt. Virtually all of the major legacy carriers have cleansed themselves with this process during the past couple of decades, some going the Chapter 22 route (two Chapter 11s). The latest is AMR, which is close to emerging once again. However, what's changed in the past few years is a substantial amount of consolidation, including the merger of United and Continental in October 2010, which has turned the domestic market into more of an oligopoly. AMR itself is poised to merge with multiple Chapter 11 attendee US Airways Group (LCC) (CCC/UR+, no moat). This will form the world's largest airline but is closely followed by the combination of United/Continental and Delta/Northwest. The Southwest/AirTran merger even consolidated the discount carriers. These four carriers now control about 82% of the domestic market. As a result, operating trends have been very impressive over the past few years, notably considering how weak the overall economy has been. We would be remiss if we did not highlight that AMR senior unsecured noteholders will achieve a full recovery in the bankruptcy process and even equity holders will come out with some value. The greater discipline and concentration in market share among a much smaller group of carriers provides hope for a better future. We are taking more of a wait-and-see approach, as we still see barriers to entry as limited.
United ended the first quarter with $5.4 billion in unrestricted cash and commented that its capital structure is the best it's had in years--it estimates an additional $4.5 billion in unencumbered assets. Our forecast includes steadily improving results and healthy free cash generation as United ultimately reaps the benefit of the merger and overall industry consolidation. In a stark contrast from the previous quarters, United noted many operational achievements this quarter, including its best first-quarter on-time performance in a decade. Specifically, its domestic on-time performance increased to 82.1% compared with 77.6% in the year-ago period. United offered anecdotes that its corporate travel managers have noticed a difference, and United believes it will continue to recapture some lost market share.
Texas Instruments' Debt Offering Looks Too Rich Versus Peers (May 1)
Texas Instruments (TXN) (A+, narrow moat) plans to issue $1 billion of new debt split between 5- and 10-year tranches. This offering marks the first time the firm has issued 10-year debt, as previously management has preferred to keep maturities shorter. We continue to believe spreads on TI's debt are too tight. Initial price talk on the 10-year offering is around 90 basis points over Treasuries. While this level is comparable with the average spread for the A+ category of the Morningstar Industrial Index, it compares unfavorably with other firms in the industry. In particular, Intel's 2.7% notes due in 2022 currently trade with a spread in excess of +100 basis points. In addition, we like Maxim Integrated Products' (MXIM) (A+, wide moat) recently issued 3.375% notes due in 2023, which have traded recently at a spread of about +147 basis points.
We view both Intel and Maxim as very strongly positioned competitively, as our wide moat ratings suggest. Intel benefits from its massive manufacturing scale, which allows it to produce faster processors at lower cost than its rivals. We expect that Intel will increasingly apply this cost advantage to chips aimed at the smartphone and tablet markets during the next couple years. While a much smaller firm, we like Maxim's position as a premier supplier of highly differentiated high-performance analog chips used in a wide variety of end markets. Similarly, TI is similarly a strong analog manufacturer, but most of its chips are sold into high-volume products like wireless handsets and hard disk drives, where rapid product cycles drive stiffer competition. TI also operates in a variety of other segments that are less profitable and/or slower growing than its analog business.
TI's debt load, which was taken on as part of the acquisition of National Semiconductor, has a very short maturity profile. We had believed that the firm's desire to keep debt maturities short indicated that it aimed to reduce leverage fairly quickly. The firm carries more debt than cash, which is unusual in the semiconductor industry. Net debt declined quickly through the end of 2012 but ticked back up slightly during the first quarter. It appears that TI is continuing to slow its debt repayment plans, instead taking advantage of the very attractive rates currently available. Earlier this year, the firm announced a 33% dividend increase and $5 billion share-repurchase plan with the intention of returning 100% of free cash flow in 2013 to shareholders.
Apple Comes to Market With an Attractive Offer (April 30)
The moment we've all been waiting for has finally arrived. Apple plans to issue debt in six tranches, including fixed- and floating-rate 3- and 5-year notes and fixed-rate 10- and 30-year bonds. If initial price talk holds--we suspect it won't--the offering looks attractive, in our view. The 10-year portion is reportedly set to price between 90 and 95 basis points over Treasuries, which would put the spread in line with the typical A rated issue in the Morningstar Industrials Index (which also averages about 10 years to maturity). We believe a spread around +80 basis points would be fair for this issue. Initial price talk on the 30-year offering is in the +115-120 basis points range, which we also view as about 10-15 basis points wide of fair value. Price talk on the 3- and 5-year fixed-rate notes is +35 and +55 basis points, respectively. We wouldn't be surprised to see tighter spreads on these notes as well given Apple's still-massive cash balance and free cash flow generation.
Initial price talk on the Apple notes also compares reasonably well with other large technology firms, though we believe several rivals provide better value. The Apple offer compares most favorably against IBM and
Google (GOOG) (rating: AA, wide moat), which have held up somewhat better recently as sentiment has turned negative across much of the tech industry. IBM's 1.875% notes due in 2022 trade at +69, which we believe is unattractively tight. Google's 3.625% notes due in 2021 trade at +69 basis points, which looks roughly fair given the shorter time to maturity. We believe Oracle (ORCL) (AA, wide moat) debt is attractive, with its 2.5% notes due in 2022 trading at about +90 basis points. We believe Oracle is fundamentally a slightly stronger credit than Apple. As such, we would be indifferent between the two firms with a roughly 5-basis-point gap in spreads, or about +95 basis points on the new Apple 10-year notes. Even more attractive, Intel 2.7% notes due in 2022 currently trade around +105 basis points. We view Intel as the best value among the large tech group.
The Apple offering is likely to be compared heavily against Microsoft's (MSFT) (AAA, wide moat) debt offering last week. Microsoft's 2.375% notes due in 2023 were issued at +70 basis points and continue to trade near that level. We believe the Microsoft notes are priced very attractively, about 10 basis points wide of fair value. We also believe Apple deserves to trade about 20 basis points wide of Microsoft, largely due to the differences in their competitive positions.
Our narrow moat rating is the biggest limiting factor on our rating relative to other large technology firms. We believe that Apple's brand and modest switching costs will enable the firm to maintain a sizable base of loyal customers over the long term. However, we aren't yet convinced that Apple has created strong enough switching costs to develop a wide moat, as it faces heavy smartphone competition from significantly lower-cost devices. We expect Apple will continue to build products and features around content and services, based on iCloud, that further lock customers into the Apple ecosystem. We've assigned the firm a positive moat trend as a result. Given the short life cycle around smartphones, though, the next couple of years will prove critical in determining the ultimate size and sustainability of Apple's business. At this point, we believe Apple's competitive advantages fall short of those built around other tech giants, such as Microsoft's Windows and enterprise software offerings, Oracle's database and applications software, and IBM's comprehensive suite of enterprise products and services.
Boeing's New 5-Year Bond Looks Slightly Rich (April 30)
With the 787 back in the air, Boeing (BA) (A-, narrow moat) is making a somewhat rare appearance in the corporate bond market with a $500 million offering split between 18-month floaters and 5-year fixed-rate bonds. We continue to view Boeing as well positioned in the rating category and maintain a constructive outlook given the re-emergence of the 787 and the company's impressive backlog, which will support growing production levels over the next several years. The defense side of the business will remain under pressure due to U.S. Department of Defense budget cuts and sequestration. Initial price talk on Boeing's 5-year tranche is in the 60 basis points above Treasuries area. We view this as slightly rich and would be buyers about 5 basis points wider. In comparison, aerospace/defense peer General Dynamics' (GD) (A, wide moat) 5-year bonds issued in November are indicated at +57, while United Technologies' (UTX) (A, wide moat) 4-year bonds are indicated at +48. We view both of these as fair.
Last week Boeing reported soft first-quarter sales with only one 787 Dreamliner delivery, but that allowed overall operating margins to remain flat even in the face of higher pension expense. Company sales were down 2.5% year over year to $18.9 billion, with flat operating margins at 8.1%. The lower sales were expected, as the grounding of the 787 restricted deliveries in the quarter. We expect Boeing will catch up on deliveries in the quarters to come as the 787 gets relaunched into service.
Commercial airplane revenue was down 2.3% to $10.7 billion while segment margins improved 150 basis points to 11.4%. The company's 137 commercial deliveries were split as follows: 102 from the 737 program, 6 of the 747, 4 of the 767, 24 of the 777, and 1 of the 787. Defense, space, and security sales were down 1.5% while segment margins expanded 130 basis points to 10.3%. The military segment saw revenue decline 1.5% while operating margins declined to 9% from 10.2% in the year-ago period.
The company maintained its 2013 guidance for sales of $82 billion-$85 billion. Commercial airplane deliveries of 635-645 will lead to sales of $51 billion-$53 billion. Military sales are expected to be $30.5 billion-$31.5 billion, lower than the $32.6 billion reported in 2012. The outlook is well grounded, with a commercial backlog of more than 4,400 aircraft worth $322 billion. Including military, total backlog was $392 billion, or more than 4.5 times annual sales.
Colgate's New Issue Looks Fully Valued; for the Rating We Like Wal-Mart (April 29)
Colgate-Palmolive (CL) (AA, wide moat) is in the market to issue a total of $700 million, consisting of 5- and 10-year notes. The firm's existing 2023 notes were last indicated in the low 60s over the treasury curve. Guidance is +35 on the 5-year bonds and +62.5 on the 10-year bonds. Based on the firm's high credit quality (our AA rating is one notch higher than the rating agencies), wide economic moat, strong brand name, and frothy demand for paper in the corporate bond market, we are not surprised to hear that there will not be any new issue concession.
We think Colgate's existing bonds are fairly valued as they currently trade tighter than equivalently rated bonds, which is appropriate for a defensive consumer products issuer. For the rating, we prefer Wal-Mart Stores' (WMT) (AA, wide moat) 2023 notes, indicated at 80 basis points over Treasuries, which we view as slightly cheap. Within the consumer products sector, Colgate's much larger peer,
Procter & Gamble (PG) (AA, wide moat), has 2022 notes that trade at 60 over the Treasury curve, about 3-5 basis points tighter than Colgate's existing bonds. Considering it is significantly larger than Colgate, it seems appropriate for P&G to trade slightly tighter. For investors with a higher risk appetite, we think Clorox (CLX) (A-, narrow moat) is a better value for the credit risk. Clorox's 2021 notes trade at about 115 over the Treasury curve, which is in line with the A- component of Morningstar's Corporate Bond Index. Given the defensive nature, we think Clorox should trade inside the index.
Colgate reported strong organic sales growth of 6% in its first quarter earnings release last week, reflecting a 4.5% increase in volume and 1.5% of price increases. This top-line performance is especially impressive as it follows a 6.5% sales increase in the year-ago quarter and doubles P&G's 3% sales increase. The increased sales helped the firm improve fixed cost operating leverage as its adjusted operating margin trended up 20 basis points to 22.8%. With 80% of sales derived outside North America, including 50% from faster-growing emerging markets, we expect the firm will continue to grow at a similar rate and continue to drive further operating margin improvements.
Altria in the Market; Lorillard Has More Upside (April 29)
Altria Group (MO) (BBB, wide moat) is reportedly in the market and issuing debt this morning consisting of 10-year and 30-year notes, in benchmark size. Altria was last in the market in August 2012 and issued 2.85% senior notes due 2022, which are currently indicated at +126 over the Treasury curve, and 4.25% senior notes due 2042, which are currently indicated at +150 over the Treasury curve. Whisper talk on the new issue is +140 for the 10-year and +170 for the 30-year. Considering the strength in the corporate bond market as investors have more cash than they know what to do with, we doubt the new issue will price at much if any concession to the existing bonds. We think Altria's existing bonds are fully valued and the bonds will move in line with the market. Altria reported first-quarter results last week which were in line with our expectations and the firm maintained its full-year guidance. As the dominant player in the U.S. market with over 50% share, Altria can generate the greatest economies of scale in the industry. Its iconic Marlboro brand has an exceptionally loyal following, with 90% of Marlboro smokers purchasing the brand 100% of the time.
Within the tobacco sector, we think Lorillard (LO) (BBB, wide moat) notes, which have long been one of our Best Ideas, have significantly more upside. Currently Lorillard's 6.875% senior notes due 2020 trade around 220 over the Treasury curve. The spread on Lorillard's notes trades significantly wider than the other tobacco names as its revenue is dependent on the menthol category. The Food and Drug Administration has been examining the menthol category to determine if additional restrictions or an outright ban on menthol products should be instituted. While the headlines surrounding the release of the panel's decision may sound dire, we think an outright ban is highly unlikely. The scientific evidence is ambiguous, local governments would lose a substantial amount of tax revenue, an underground market for menthol could emerge, thus limiting the FDA's ability to control the category, and 80% of menthol smokers are minorities. We expect the FDA will impose greater restrictions on the marketing and perhaps the availability of menthol cigarettes, which is incorporated in our forecast. Nevertheless, any restrictions imposed on the menthol category are likely to hurt Lorillard more than its more diversified peers. Once the FDA releases its conclusions, and assuming our opinion is correct, we expect credit spreads for Lorillard's bonds to tighten significantly and should trade at about a 25-basis-point discount to Altria. Given where Altria is currently trading, that could provide investors with 3 points of upside potential.
TJX's New Bond Deal Is on the Sale Rack (April 29)
TJX Companies (TJX) (A, narrow moat) is coming to market with $500 million in 10-year notes. Initial price talk around 100 basis points over Treasuries looks attractive as it is well wide of other similar-rated retailers. Home Depot (HD) (A, wide moat) 2023 notes were recently indicated at 85 basis points over Treasuries, while Lowe's (LOW) (A, wide moat) 2022 notes were at 89 basis points over Treasuries and Target's (TGT) (A, no moat) 2022 notes were at 79 basis points over Treasuries. We view Home Depot and Target's bonds at fair value, while Lowe's bonds are slightly cheap. Accordingly, we would be interested in the TJX deal down to around 80 basis points over Treasuries.
Our solid investment-grade credit rating for TJX reflects the company's moderate lease-adjusted credit metrics and narrow economic moat. TJX is the nation's largest off-price retailer of brand-name apparel and home fashions. The company has improved profit margins during the past two years through strong merchandise margins, better execution, and controlled spending. TJX strives to perform well during a wide range of economic conditions by consistently procuring quality inventory at reduced prices, and passing the savings on to its customers. The ability to deliver merchandise with aspirational appeal to brand-conscious consumers has driven positive same-store sales for all but two quarters since 2008. TJX is in good financial health, with lease-adjusted leverage of about 1.6 times. The firm's stable debt load for the past decade, coupled with a gradual increase in earnings, has driven leverage down from over 2 times. The company has not tapped the debt market since 1999. TJX's next debt maturity is just $400 million in notes maturing August 2015 and the firm has ample liquidity, including $1.5 billion in cash and a $1 billion revolver to fund working-capital needs. TJX is able to turn roughly 5% of revenue into free cash flow, suggesting it can comfortably support its $775 million debt burden while paying a dividend and buying back shares (a combined nearly $1.5 billion in 2012). We expect that management will continue to buy back shares, as TJX is positioned to generate about $1 billion in free cash flow in fiscal 2013. In addition, we believe that over time management will continue to return cash to shareholders through increased dividends. With a five-year Cash Flow Cushion that is nearly 2 times our base-case expense and obligation forecast, we are not overly concerned with this level of shareholder-friendly activity.
Praxair Back in the Market With Another Rich Offering (April 29)
Praxair (PX) (A, wide moat) is back in the market today looking to raise $600 million, split between 5.5- and 30-year maturities. The 30-year is expected to be a reopening of the company's existing 3.55% note due 2042. Praxair accessed the bond market a couple times during the first quarter, raising $1.4 billion spread across 3-, 5-, and 10-year maturities with proceeds used to help fund the $1.1 billion debt-financed acquisition of NuCO2 and refinance some upcoming maturities. The company has two bonds totaling $850 million coming due in June. This latest offering could be utilized to complete these financing needs.
As we've noted before, the industrial gas sector trades tight relative to other highly rated industrial sectors and we expect this offering to price rich as well. The existing 3.55% notes due 2042 recently traded around a spread of 82 basis points over Treasuries, which we view as rich. For comparison, similar-rated United Technologies, has a 2042 note that recently traded around a spread of 100 basis points over Treasuries, which seems closer to fair value to us. With initial price talk on the new 30-year in the area of +90 and very strong demand for new issuance, we expect final pricing to be similar to existing levels. Initial price talk on the 5.5-year of low 60s actually sounds fair, if it holds. However, with the company's 1.2% notes due 2018 quoted around 50 basis points over Treasuries, we would not be surprised to see final pricing tighten meaningfully from the talk.
Praxair is a global leader in the industrial gas industry, where the top four players hold nearly 80% of the market. Praxair's wide moat rating stems from its on-site business model and long term contracts, typically lasting 15-20 years, which gives the company tremendous pricing power. Although the recently announced acquisition of NuCO2 for $1.1 billion will take leverage up to 2.4 times on a pro forma basis, we expect leverage to move down closer to 2 times over the medium term, more appropriate for our A rating. NuCO2 is a leading provider of beverage carbonation systems to the U.S. restaurant industry and generates stable and growing free cash flow, consistent with Praxair's existing businesses.
McDonald's New Bond Deal Is Not on Our Value Menu (April 29)
McDonald's (MCD) (AA-, wide moat) is pricing $500 million in 30-year notes today. Initial price talk of 90 basis points over Treasuries is too rich in our view, as it is inside where Wal-Mart's 2043 notes were recently indicated (95 basis points over Treasuries). We find Wal-Mart's bonds slightly cheap at this level and would direct an investor to this credit looking for exposure in the consumer space at the longer end of the curve. We view fair value for McDonald's 30-year notes at around +100. Lowe's 2042 notes were recently indicated at 122 basis points over Treasuries, which we view as very slightly cheap. We would place fair value for Lowe's notes around 115 basis points over Treasuries, and McDonald's should trade around 15 basis points tighter given is stronger credit quality.
Still, we have a very favorable view of McDonald's as a credit investment, just not at indicated levels. The firm recently reported lackluster first-quarter results due to the continued challenging macro environment, but we were pleased at its commitment to maintaining a solid balance sheet. McDonald's cited on its earnings call, as it has in the past, the importance of having a solid balance sheet for its franchisee system. Cash priorities remain the same: first, reinvesting in the business, and then shareholder returns through dividends and share repurchases. Accordingly, while we expect McDonald's to continue to issue debt as earnings grow and return a large quantity of cash to shareholders ($1.1 billion was spent on dividends and share repurchases during the first quarter), we don't believe it will alter its leverage profile. McDonald's has maintained lease-adjusted leverage around 2.25 times, and we expect it to remain at this level. The firm's debt balance increased by just over $1 billion in 2012, and management said the amount would be less this year.
Click here to see more new bond issuance for the week ended May 3, 2013.