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NEW YORK (IFR) - Investors piled into a hybrid bond offering from US media giant Viacom on Thursday, but the issuer had to sweeten some of the terms to reflect the risk of sweeping US tax reforms.
The bond initially included a tax event call option allowing Viacom to buy the debt back at par in the event of changes in tax law, according to an SEC filing.
The redemption price, however, was raised to 101 when the bond was officially announced.
Investors demanded more compensation than usual for 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."
Books for the deal, which Bank of America Merrill Lynch and Morgan Stanley began marketing on Tuesday, had swelled to more than US$10bn by noon - proving that the changes had helped alleviate investors' concerns.
Viacom launched the US$1.3bn two-part issue up to 87.5bp inside initial price thoughts.
The US$650m 40NC5 issue launched at 5.875%, inside IPTS of 6.625%-6.75%, while the US$650m 40NC10 launched at 6.25%, inside IPTs of 7% area.
Tax reform has been a big talking point in the corporate bond market over the past few weeks amid expectations of a major overhaul under President Trump.
Steven Mnuchin, Trump's Treasury Secretary, said on Thursday that he wanted to pass "very significant" tax reform before Congress breaks for its August recess.
Proposals include the elimination of the tax-deductible status of interest payments and changes to the rules on repatriation which could have a big impact on the cost of debt for issuers.
Most hybrid bonds traditionally include language allowing issuers to redeem the debt at par plus accrued interest if tax rules change - but investors are becoming increasingly sensitive to those clauses given the potential reforms.
Some buyside sources told IFR they would demand higher premiums on such language in future bond deals.
Strong demand for corporate bonds, however, means investors have limited power.
The attractive yields offered on Viacom's hybrid bonds - which will help it retain its investment-grade credit rating - were too much for some on the buyside to turn down.
"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, rated Ba1/BB/BB+, are expected to price later on Thursday.
Reporting by Will Caiger-Smith; Additional reporting by Davide Scigliuzzo; Editing by Shankar Ramakrishnan and Natalie Harrison