Occidental Petroleum issued $13bn in bonds on Tuesday to fund its takeover of Anadarko, an acquisition that has pitted famed investors Warren Buffett and Carl Icahn against one another.
Orders for the 10-part bond sale swelled to $78bn by midday on Tuesday in New York, according to two people briefed on the matter, allowing underwriters to lower the yield on the offering compared with the initial guidance released earlier in the day.
The strong appetite underscored investors’ renewed interest in corporate debt amid a global bond rally that has pushed yields for government bonds sharply lower.
The 10-year bond priced at 185 basis points above comparably maturing US Treasury bonds, down from the initial guidance of 220bp.
This would peg the yield at about 3.56 per cent. Occidental’s current outstanding debt, maturing in 2027, yielded 3.187 per cent as of Tuesday evening. The effective yield on the ICE Bank of America index of investment grade energy debt was 3.52 per cent.
The more favourable pricing came even after Moody’s, the rating agency, last week downgraded Occidental’s credit rating to Baa3, the lowest investment grade level.
Matt Brill, senior portfolio manager for Invesco, said the US investment grade credit market was set to see an increase in buying by foreign investors facing negative yielding government debt.
“Foreign investors are hungry for yield because of the negative yielding rates in Europe and elsewhere, so we think there will be a lot of demand from those investors for new credit issuance,” he said.
Proceeds from the deal will be used to finance Occidental’s $55bn takeover of Anadarko. The companies agreed the deal in May after a bidding war involving Chevron, which initially offered $38bn.
The Occidental acquisition is set to close later this year and expands the group’s reach in the Permian Basin, a centre of US shale oil production, where Anadarko has drilling rights to 250,000 acres.
The purchase was sealed when Occidental secured funding from Mr Buffett’s Berkshire Hathaway. Under the terms of the deal, Berkshire will invest $10bn in Occidental in preferred shares with an 8 per cent dividend, above market rates.
The financing arrangement with Mr Buffett’s company was mocked as “stealing candy from a baby” by Mr Icahn, who holds $1.6bn in Occidental stock. In May, Mr Icahn filed a lawsuit against the oil company, claiming the deal was “fundamentally misguided and hugely overpriced”.
Occidental shares have traded lower since the deal was announced in May, indicating investors share Mr Icahn’s concerns the oil major overpaid for Anadarko.
Chevron had increased its initial $38bn offer to $48bn but declined to raise it further and walked away with a $1bn break fee from Anadarko.