Wednesday, December 8, 2010

Spending A Languid Tuesday Morning -- Talking Up Merck Debt, On The Phone -- To Fellow-Traders? Price: $8.15 million!

I am actually a little ashamed to admit that I know just how little work it takes to place A1-rated corporate five- and ten- year paper.

And to be fair, it is true that -- after the initial allocation -- the smaller shops, each re-allocate the bite-sized bits of the deal's tranches, and they may spend a few days on the phone, placing the re-allocated sercurities. That may involve some actual salesmanship -- some real work.

But up at the top of the tombstone's lede-table, the co-leads -- J.P Morgan, and Banc of America's Merrill Lynch imprint (as well as the recently added Citigroup) -- likely spent only about half of the morning, and part of the afternoon, on Tuesday, making calls. Making calls to place the initial, largest chunks of these two tranches -- totalling $2 billion.

Selling Merck paper is truly a no-brainer -- one could (almost) literally fax the calls in, and get the sale, just as easily. [I'll stop short of suggesting that a pack of lemurs could be trained to run the fax machines, and hit auto-dial, here -- but see image at right, just the same(!).]

Afterall, Merck is only slightly less-creditworthy than the US government, yet the investor can make about three-quarters of a percent of extra yield, simply by accepting the nearly non-existent default risk presented by a $45 billion public company, which has just under SIX-times (see page 51 of the most recent Merck SEC Form 10-Q: 1/.168 = 5.952) as much unrestricted free equity, as it has debt and on balance-sheet liabilities. Like I said -- a no brainer.

From the final prospectus, then -- at page S-18:

. . . .The following table shows the underwriting discounts that we will pay to the underwriters in connection with the offering of the notes:

2016 notes | Per note: 0.350%
Total: $2,975,000

2021 notes | Per note: 0.450%
Total: $5,175,000

Grand Total: $8,150,000. . . .

Expenses associated with this offering to be paid by us, other than underwriting discounts, are estimated to be approximately $1.1 million. . . .

My reaction? Great work -- if you can get it -- at BofA's Merrill Lynch, J.P. Morgan and Citi (a subsequent top tier addition to the Merck 2010 debt deal bookrunners). Now, can someone from "Madagascar 2" come collect this lil' fellow?

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