PayPal is borrowing $3 billion to help fund its debt buyback plan

PayPal Holdings Inc. entered the market on Monday with a $3 billion corporate bond financing to help the online money transfer and payments giant fund a $2 billion takeover bid for his own debt.

The four-part bond deal included issuing new debt that matures in five to 40 years, most of it PayPal PYPL,
-1.50%
plans to use to fund a concurrent takeover bid for $2 billion of its outstanding bonds, according to public filing.

Rising rates as the Federal Reserve strives to reverse its easy money pandemic stance has led to a painful period for bond investors in 2022, sending bond prices to levels not seen for the last times as a result of the 2008 financial crisis and increasing borrowing costs for major US. companies.

On the other hand, investors like the higher yields offered. PayPal’s new $1 billion 10-year wad of bonds, rated A3 by Moody’s and A- by S&P Global, is priced 155 basis points above the Treasury’s risk-free rate, according to a person with direct knowledge of the transactions.

With the 10-year Treasury rate TMUBMUSD10Y,
2.904%
pegged at nearly 2.877% plus the spread, which equates to a 4.4% coupon for new bonds due in a decade. Its 30-year bonds, paying a spread of 215 basis points above the 30-year TMUBMUSD30Y,
3.123%
rate, results in a coupon of 5.25%.

Companies have been keen to pay higher costs in anticipation of the potential deterioration in borrowing conditions in the future, especially with the Fed looking to rapidly raise rates this year, despite the carnage in stocks, bonds and somewhere else. Bond prices move in the opposite direction to yields.

“In our view, absolute market direction still depends on top-down drivers, particularly the interplay between the inflation signal and policy response,” Goldman Sachs credit analysts wrote in a weekly note. “And at this time, this interaction is not predictable enough to translate into a lasting improvement in risk appetite.”

PayPal’s share price closed 1.5% lower on Monday, while the COMP of the tech-heavy Nasdaq Composite Index
-1.20%
loses 1.2% to start the week and the S&P 500 SPX index,
-0.39%
closed down 0.4%. That’s on top of the Nasdaq’s 25.5% drop in 2022, compared to a 58.8% drop this year for PayPal shares, according to FactSet.

But PayPal’s maturing debt — and subject to the company’s takeover bid — rallied (see chart) in secondary trading on Monday, according to data from BondCliQ.

PayPal debt subject to tender rallies on Monday.

BondCliq

PayPal said it wants to buy $1 billion of its 2.2% coupon bonds maturing later in 2022 and $1 billion of its 1.35% bonds maturing in 2023, with the proceeds. The tender offer is in cash and is expected to close on May 23.

Some of PayPal’s longer-dated bonds (shown in green above), particularly debt maturing in June 2050, also got a boost in trading on Monday. Prices for that debt were still around $78, down from around $93 three months ago, according to BondCliQ. Bonds are usually issued at $100.

The payments giant first launched a crypto feature in the US in 2020 to allow users to buy, sell and hold cryptocurrencies. BitcoinBTC USD,
+0.38%
has since fallen 69% from its November peak, according to Dow Jones Market Data, while other parts of the nascent digital asset industry have also come under heavy selling pressure.

PayPal did not immediately respond to a request for comment.

Related: Fed Mester puts 75 basis point rate hike back on the table for September

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