BNP Protected AB Rtn S&P

PepsiCo Inc. (PEP) plans to sell a $1.25 billion offering of senior unsecured notes in two parts, owing to falling yields on debt.

The first offering will include a three-year note of $500 million, 0.8% notes with a risk premium of 57 basis points over Treasuries. The second part will launch a $750 million 10-year, 3% bond at a spread of 97 basis points. Interest rates on the 2021 notes are within 0.05 percentage points of the lowest on record for that maturity.

BNP Paribas SA (BNP), Deutsche Bank AG (DB) and Morgan Stanley (MS) are acting as the joint lead managers for the sale. Further, the sale proceeds of the notes will be used for general corporate purposes, such as the repayment of outstanding debt securities.

Also, the deal has been rated Aa3 by Moody's Investors Service, a unit of Moody’s Corp. (MCO) and single-A-minus by Standard & Poor's.

Besides this sale, Pepsi had sold bonds in May, issuing $1 billion of 5-year, 2.5% notes with a risk premium of 57 basis points over Treasuries and $750 million of two-year floating-rate securities that pay 8 basis points above the three-month London interbank offered rate.

Like Pepsi, other credit worthy companies from AT&T Inc. (T) to Walt Disney Co. (DIS) have also sold $20 billion of debt in US in August 2011.

The uncertain economy has increased the investors’ concern of fluctuating stocks and speculative-grade debt, which has kept the yields on investment-grade corporate debt at low levels. Moreover, the company is facing slowing consumer demand besides exceptionally high levels of commodity inflation.

Nevertheless, Pepsi has solid businesses across the worldwide snacks and beverage segments, and the acquisition of Wimm-Bill-Dann in Russia has also fuelled the company’s volumes and revenues.

Currently, we have a Neutral rating on the stock. Pepsi holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.

 
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