Will the refinancing of existing notes improve Zoetis' weighted‑average cost of debt and credit rating?
Answer
Yes – the refinancing is expected to lower Zoetis’ weighted‑average cost of debt and should be viewed positively by rating agencies.
Fundamentals:
Zoetis is issuing $1.85 bn of new senior notes at 4.15 % (2028) and 5.00 % (2035) to retire $750 mn of 4.50 % notes due 2025 and a larger tranche of 5.4 % notes. By swapping higher‑‑coupon (4.5 % / 5.4 %) obligations for lower‑‑coupon securities, the company’s overall interest‑expense on its debt portfolio will fall. The longer‑dated 2028 and 2035 maturities also stretch the repayment schedule, reducing near‑term refinancing risk and improving cash‑flow coverage ratios—key metrics that rating agencies monitor.
Credit‑rating impact:
A lower weighted‑average cost of debt and a more “bullet‑proof” maturity profile typically translate into a modest credit‑rating upgrade or at least a stabilization of the current rating. The reduction in leverage (the $750 mn repayment plus the higher‑coupon tranche) will improve the debt‑to‑EBITDA leverage metric, another focal point for S&P, Moody’s and Fitch. While the upgrade is unlikely to be dramatic (the issuance does not dramatically change the capital structure size), it should remove a near‑term rating‑drag and position Zoetis for a potential step‑up in the next annual review.
Trading implications:
* Fixed‑income: Existing 4.5 % and 5.4 % notes will likely price at a discount to the new 4.15 %/5.00 % issues, creating a modest yield‑curve flattening opportunity for bond traders.
* Equity: The anticipated reduction in financing costs and the credit‑rating tail‑wind should support the stock, especially if analysts upgrade the company’s credit outlook. A short‑to‑medium‑term bullish bias on ZTS is justified, with upside potential in the 3‑6 % range pending confirmation from rating agency actions.
In short, the refinancing will improve Zoetis’ weighted‑average cost of debt and is likely to be viewed favorably by credit‑rating agencies, providing a modest upside catalyst for both its bond and equity markets.