Corporate Bond Issuance and Trading. As a member of the BofA/Merrill Lynch corpo- 100

rate bond origination team, you are working on an upcoming transaction on behalf of Western

Digital Corp. (Nasdaq: WDC) which is planning a massive high-yield bond oering to fund

the acquisition of SanDisk Corp. (Nasdaq: SNDK). As the senior financial analyst on the

deal, you are in charge of all the fixed-income analysis and report directly to the lead banker.

A lot is on the line for your company because this deal might become the largest high-yield

bond oering in 2016.

Here is recent press coverage of the announcement of the bond oering:

Western Digital Readies $5.6B Bond Oering Backing SanDisk Buy7 year us

Western Digital this morning launched o the shadow calendar its SanDisk acquisition bond

financing, comprising $1.5 billion of seven-year (non-call three) secured notes and $4.1 billion

of eight-year (non-call three) senior notes, according to sources. Roadshows are scheduled

to run Monday, March 21 through Monday, March 28, with pricing to follow via a Bank of

America-led bookrunner team, the sources added.

While first call premiums have not been outlined for the two series, take note that while par

plus 75% coupon to balance the short schedule is most typical, an issuer-friendly arrangement

4

at par plus 50% coupon has become more acceptable over the past year. Beyond that, market

sources relay that the equity-clawback feature on both tranches is most typical, as three-year

for up to 35% of the issue, at par plus coupon, and the change-of-control call provisions are

also regular-way, at 101% of par.

Additional bookrunners on the long-awaited eort are J.P. Morgan, Credit Suisse, RBC, and

HSBC. Proceeds, along with those from a TLA, TLB, and an RC draw, will be used to back

the $19 billion acquisition of the rival storage-technology company, and issuance is under Rule

144A for life.

As reported, the company has guided the $4.2 billion U.S. dollar TLB, and $550 millionequivalent,

euro-denominated TLB at L/E+450-475, with a 0.75% floor and OID of 98.5.

The seven-year, covenant-lite term debt will include 12 months of 101 soft call protection,

and at current guidance the term loan would yield roughly 5.64-5.9% to maturity.

Take note that the same bank line up is arranging the loans but J.P. Morgan is the left lead.

A planned $3 billion, five-year A term loan has been increased to $3.75 billion, with pricing

set at L+200. Western Digital also plans to draw down a portion of its $1 billion, five-year

revolver at closing.

Issuer ratings have firmed at BB+/Ba1/BB+. The secured debt is rated BBB-/Ba1/BBB-,

with a 2L (lower end of substantial, 80-90%) recovery rating from S&P's. The unsecured

debt is rated BB+/Ba2/BB+, with a 4L (lower end of average 40-50%) recovery rating.

Irvine, Calif.-based Western Digital makes hard disk drives, solid state drives, and cloudnetwork

storage solutions, with a client focus on set-top boxes, printers, in-car navigation

devices, and other general consumer electronics. Milpitas, Calif.-based SanDisk makes solidstate

drives and other storage solutions with a client focus on computers, tablets, phones,

and wearables. (March 18, 2016)

Your sta has also prepared market information and data for you in addition to internal reports

and numbers. Important background information can be found in Calamos Investments,

High Yield Market Review and Outlook, March 2016, Guggenheim Investments, High-Yield

and Bank Loan Sector Outlook, February 2016, and Springsted Advisors (20160328), US Interest

Rates. Other useful market-data resources for pricing and benchmarking are the ICE

BofA US High-Yield Index Option-Adjusted Spread (BAMLH0A0HYM2) available

from The St. Louis Federal Reserve Bank at https://fred.stlouisfed.org/series/BAMLH0A0HYM2

as well as the constant maturity 7Y and 10Y UST rates at https://fred.stlouisfed.org/series/DGS7

and https://fred.stlouisfed.org/series/DGS10.

(a) Analyze the terms of the Western Digital oering. Here is an extract of the term sheet:

Issuer Western Digital Corporation (WDC)

Ratings BBB-/Ba1/BBB- BB+/Ba2/BB+

Amount

Issue Secured notes (144A-life) Senior notes (144A-life)

Coupon

Price

Yield

Spread UST+

Maturity April 1, 2023 April 1, 2024

Call

Trade March 30, 2016 March 30, 2016

Settle (T+10) April 13, 2016 April 13, 2016

Bookrunners BAML/JPM/CS/RBC/MIZ/MUFG/HSBC/SMBC

How well has WDC been doing? What is the financing for?

What exactly is on oer? How do the tranches dier?

Are the bond callable? If so, when and why?

What other debt is WDC taking on and how is it structured?

(b) Using the attached information or any other data, whose source you would have to

carefully document, price the debt and complete the above termsheet.

How is corporate debt priced? Propose a methodology.

What yields would you propose for the two series? Carefully explain to the lead

banker your reasoning and document your analysis.

Determine the series' coupon and price to fill in all the remaining fields above.

(c) Research the issue and try to find out what happened. Did the final oering dier from

the initial announcement and, if so, what happened? How did the pricing vary from

your analysis and why?

(d) In order to secure the lead in the deal, your company has agreed to oer liquidity

services up to 12 month. In essence, BAML's corporate-bond traders stand ready to

make markets in the WDC series, i.e., quote firm bid-ask prices at which they stand

ready to buy or sell typical blocks of $1m to $2m. In order to do so, they have to keep

significant inventory in the notes.

When traders in corporates have to hold (long) positions for inventory or prop(rietary)-

trading purposes they typically take the osetting position in maturity-matched US

Treasuries. Why? What is the purpose of this strategy and what is their residual

position?

What are the risks and benefits of this strategy?

How would your colleagues at BAML fund the necessary inventory to provide the

promised liquidity services to investors and the issuer and at the same time implement

the long-short strategy? Describe two dierent implementation and recommend

your favorite one.