At the end of 2010 and the beginning of 2011, there were strong indications that interest rates would begin to rise from current historic low levels. Honeywell’s objective was to ensure that the current historic low interest rate environment was captured through a new debt issuance. Prior to the recession Honeywell deployed capital to create shareowner value through dividends, acquisitions, and share repurchases, spending a combined amount of $10.4 billion from 2007 through 2008.

In addition, during this period Honeywell increased debt levels by $3.3 billion. During the recession the pension liability increased credit adjusted debt by $3.5 billion in 2008 due substantially to a 29% loss on asset returns. Honeywell was faced with the challenge of preserving its historically reliable A/A2 credit rating. Therefore, the corporate debt solution needed to address the need to deleverage through debt repayments and pension contributions. Honeywell’s corporate debt solution needed to reduce Honeywell’s weighted average cost of debt and extend the debt maturity profile, while reducing total credit rating adjusted debt.

Andrea Vasilevski explains:

“First, Honeywell determined the target 2011 funding opportunities for a debt issuance that would reduce Honeywell’s cost of capital and would not jeopardise Honeywell’s implied credit rating.”

Honeywell’s corporate debt solution guided Honeywell to issue $1.4 billion of term debt in Q1 2011 with Bank of America Merrill Lynch, Barclays and Citi as joint bookrunners, which comprised $800m 4.25% notes due 2021 and $600m 5.375% notes due 2041. This was the lowest 30 year coupon that Honeywell has ever issued and the ten year note was the lowest coupon Honeywell has ever issued regardless of tenor. Through Honeywell’s interest rate risk management solution, Honeywell chose to swap the ten year note to floating at issuance through a syndication with Barclays, which provided the benefits of achieving FAS 133 short cut accounting and increased floating rate exposure.

Andrea Vasilevski comments:

“We lowered the credit charge in swap pricing through competitive bidding of nine banks and limited leakage of Treasuries while the bond was priced. This resulted in the effective average interest rate of 1.83% after tax for the total $1.4 billion note issuance.”

Honeywell captured the low interest rate environment by issuing $600m of 30 year notes at 5.375% and leaving it fixed. Since the US Federal Reserve would be unlikely to raise interest rates until at least late 2011 or early 2012, swapping the $800m of ten-year notes to floating at issuance captured the benefits of low short-term rates. Swapping the ten-year note lowered the after tax effective interest rate of the $1.4 billion bond deal to 1.83%. The proceeds were used to fund a $1 billion voluntary cash pension contribution that would increase the funded status to 90% at the end of 2011, provided an 8% assumed rate of return, and resulted in a $350m cash tax benefit in 2011. Additionally, the 5.625% notes due in 2012 were refinanced through a tender and subsequent make-whole call.

Andrea Vasilevski concludes:

“Honeywell’s weighted average cost of debt was lowered from 5.6% in 2009 to 5.1% and the weighted average maturity was increased from nine to 12 years during this same period.”