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The company behind Alphaville’s favourite unhinged branding presentation — and America’s second-favourite soda — is taking another bold step. It’s inviting bond investors to punt on interest rates.
The soda and packaged-goods brand sold $2.5bn of debt on Wednesday, and the biggest piece of the offering was a $1bn one-year floating-rate note.
This is a little strange, right? Pepsi is a quality credit with an A+ rating. The sell-off in long-dated Treasuries has abated, and investment-grade borrowers like Pepsi don’t have trouble extending the maturities of their debt. The US yield curve is inverted! The 1-year Treasury is yielding 5.3 per cent and the 10-year is at 4.5 per cent.
Pepsi’s one-year bond sold at a 0.4-percentage-point premium to SOFR, which was 5.3 per cent on Nov. 8. So let’s call that 5.7 per cent. A Pepsi bond maturing in mid-2035 trades at a yield of . . . 5.7 per cent, according to TRACE data. That bond won’t need to be refinanced for more than a decade. TRACE also shows a Pepsi bond maturing next March that’s yielding 5.1 per cent.
Issuing a floating-rate note maturing in one year makes the most sense for Pepsi if the Fed’s policy rates decline from here. Or maybe if they got some type of excellent rate-hedging deal from their underwriters? The deal was led by BofA, which has, err, not-insignificant duration exposure itself.
The company also sold two fixed-rate bonds Wednesday, but they’re also on the relative short end of the duration range: A $800mn two-year bond and a $700mn three-year bond.
To be sure, fed funds futures are pricing in a couple of rate cuts next year, but we wouldn’t call the data from CME a strong consensus, by any means:
CreditSights analysts are equally puzzled by all of this. The decision “seems to us speculatively optimistic about rates in comparison to other high-quality issuance we have seen during the rate hike environment,” they noted on Wednesday.
Does Pepsi’s corporate finance division know something we don’t? Do they have a super-secret recession indicator tied to soda consumption? Are they so confident in that indicator that they’re willing to bet financing costs on it? Or did they wake up one morning and decide to punt on a recession striking before November of 2024?
We’ve asked Pepsi and will update this post if we get more colour.
