In the News: Recent Developments

February 22, 2001

In ‘Unusual’ Effort, ExxonMobil to Replace Fixed-Rate Bonds With Floating Debt

By Alex Maurice

ExxonMobil Corp. is engaging in an “unusual undertaking” in which it seeks to buy back $327.8 million of private-activity bonds issued in 13 different series and through seven different conduits.

The company, which one analyst said “is generating so much cash, they don’t know where to put the money,” is seeking to save on interest payments by retiring the fixed-rate bonds it buys back and issuing variable-rate debt.

The tender request, which was issued on Feb. 16 and expires on March 9, 2001, is open to holders of 13 specific series of bonds issued between 1984 and 1998 that were issued through the following conduits: California Pollution Control Financing Authority; Gulf Coast Industrial Development Authority; Lower Neches Valley, Tex., Authority Industrial Development Corp.; The Industrial Development Board of Mobile County, Ala.; Rhode Island Industrial Facilities Corp.; Valdez, Alaska; and Will County, Ill. The dealer manager for the buyback is Morgan Stanley Dean Witter

“It’s an unusual undertaking in terms of the number of different issuers involved, the coupons, and the various call dates,” said Joseph Fichera, senior managing director and CEO of Saber Partners, the financial adviser to ExxonMobil. “The offer is for the entire outstanding amount of $327,840,000.”

ExxonMobil is “interested in buying back up to the full” amount of the listed bonds, said Robert Apfel, president of Bondholder Communications Group, the information agent for the offer.

The actual buyback, however, is predicated on the targeted savings that ExxonMobil is seeking, he noted.

The owners of each of the series of bonds, which have fixed rates between 4.95% and 6.40%, will have the option of making either a competitive or noncompetitive offer. Owners making a competitive offer would submit a minimum offer price at which they would sell their bonds. Owners participating in the noncompetitive tender would simply offer to sell without specifying a price. The purchase price would then be determined using a modified Dutch auction. When the price is set, all of the bonds offered at or below the set price would be purchased at the set price, and the noncompetitive bidders would also get that price.

Once the buyback is completed, ExxonMobil will issue variable-rate bonds with a daily reset. The company, which is triple-A rated, stands to earn considerable savings by doing so, said analysts. A yield of 3.31% was being offered for variable-rate, daily, general market, non-alternative minimum tax, triple-A bonds on Feb. 20, according to Municipal Market Data.

Apfel said that a switch to variable rates “provides the best debt service cost.”

Bruce Schwartz, a director at Standard & Poor’s, said that ExxonMobil will have a “lower average interest rate by being in floating versus fixed-rate [debt].” He pointed out that historically interest rates and oil prices have tended to go in the same direction, therefore, a switch to variable-rate debt “better matches their interest expense to earnings capability.”

Moreover, said Schwartz, “ExxonMobil is generating so much cash, they don’t know where to put the money. And they are running out of debt to repay.” He noted that ExxonMobil is the world’s largest publicly traded oil company with approximately $292 billion in market capitalization.

If ExxonMobil buys back the total of $327.8 million in bonds, the company will have almost no fixed-rate, tax-exempt debt outstanding, said Fichera, who noted that the company has about $1 billion outstanding in variable-rate bonds.

Almost all of the same conduits will be used for issuance of the variable-rate debt, which is expected to occur on March 16. The new bonds, issued through the same conduits as the fixed-rate debt, will not fall under the private-activity bond cap allocation because the issues are similar to refundings, said a lawyer who was involved in the deal and requested anonymity.

Representatives for both ExxonMobil and Morgan Stanley Dean Witter declined to comment.

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