Tense? Nervous? In 2003, entering the euro market stage for the first time needn't be a headache for even the smallest of borrowers. As Neil Day reports, inaugural issues have had an easy passage to market this year, and their impressive performance may persuade yet more new names to make their debut.
The buoyant conditions in the euro corporate market this year have tempted many companies to launch debut bond issues. Continuing the shift from bank loan to capital markets financing, the historic low interest rates and tight spreads on offer have only added new weight to the trend. In many cases, credit default swaps are trading through loans.
Meanwhile investors, tired of seeing the same telecoms, utilities and auto names returning to the market with repeat offerings - and dominating their indices - have been crying out for diversification opportunities.
"There is really an enormous amount of demand for new names," says one head of corporate debt capital markets (DCM). "In the environment we have had throughout the year, it's fair to say that more or less anything sells."
Such has been investors' interest in buying new names that they have been especially willing to work quickly to analyse credits, and those that have been slow to move have often found that their orders have been placed too late.
"There have been no problems in bringing new names to the market," says Justin May, global head of corporate DCM at ABN Amro in London. "Debut issuers are still roadshowing their inaugural transactions, but they do not always have to do so as extensively as in the past. A roadshow could go on for what felt like weeks on end in the past, whereas now you see concise roadshows backed up by investor conference calls and research."
A prime example of the reception that debut issuers could expect in the euro corporate market this year was the inaugural transaction from German consumer products group Henkel. The issuer approached the market in late May, as credit spreads were rallying and the corporate pipeline was bulging, with a 10 year deal via Citigroup, Deutsche Bank, Dresdner Kleinwort Wasserstein and HSBC.
The clamour for A1/A+ rated Henkel's paper was highlighted by both the strength of demand from investors and the price that the corporate could achieve. Within hours of the books being opened, over Eu5bn of orders had been placed by more than 350 investors. The issuer could therefore increase the size of the deal from the originally planned Eu750m to Eu1bn.
And after refining price guidance from 48bp-53bp over mid-swaps to 45bp-48bp, Henkel was able to achieve pricing of 45bp over. Even a downgrade from Standard & Poor's during the premarketing could not put a dampener on the deal's reception.
"It was a perfect deal for the market," said a syndicate official at Deutsche at the time. "A debut issuer with a strong product range and rating."
The sentiment was shared by syndicate members. "The deal was a complete success," said one. "This is a rare borrower with a good rating. The transaction was tightly priced, but because of the rating and the rarity value, this is justified." One banker even said that given Henkel's credentials the pricing appeared cheap.
While companies like Henkel have been able to profit from not only the name diversification that they can offer, but also from selling paper in a relatively under-supplied industry sector, new names in more familiar sectors have also proven appealing to investors.
The telecoms sector was the source of the greatest supply and perhaps also the greatest disappointment in 2001 and 2002, but going into 2003 sentiment towards the industry had already started to turn. France Télécom, for example, had been able to launch a jumbo transaction at the close of last year, and then was just one of several telcos to open the 30 year sector this January and February.
But if investors were keen to increase their telecoms weightings, they were even more interested in adding new names from the sector to their portfolios. This was clear from the debut bond from Telekom Austria, launched by ABN Amro, HypoVereinsbank and Lehman Brothers.
The company launched its issue in mid-July when interest rates were at 40 year lows. Demand for the new issue was overwhelming. The book for the Eu750m 10 year deal totalled Eu7bn, with over 400 accounts present. This demand enabled Baa2/BBB rated Telekom Austria to achieve pricing at the tight end of its 110bp-115bp guidance - inside its larger triple-B rated peers.
"This is a rare opportunity to diversify in the triple-B telecoms sector dominated by the likes of Telecom Italia, France Télécom and Deutsche Telekom," said a syndicate manager at Lehman Brothers. "The diversification play is a key factor in the success of this issue."
A HypoVereinsbank banker echoed this sentiment. "This benchmark transaction will feature in all the relevant indices, so investors were compelled to be involved," he said. "As it is a rare issuer this deal presented an opportunity for diversification. Telekom Austria, with its strong rating and low levels of outstanding debt, is a must-have. The issuer has made it clear that it is, has been and always will be, a rare borrower, and this is attractive."
Size isn't everything
As highlighted by the HypoVereinsbank official, the Eu1bn size of Telekom Austria's debut ensured that the bond entered all the major indices. But a notable trend this year has been the number of deals that have been smaller than the Eu500m minimum required by many bond indices. In the first half of the year 22 public corporate deals equal to or greater than Eu150m and less than Eu500m were launched.
"The adage that size always matters has not held true this year," says ABN Amro's May. "Given that investors need to diversify their portfolios, they have been more wiling to look at deals that are smaller than Eu500m. Not so long ago deals of less than Eu500m needed to pay a premium, but that is no longer necessarily the case."
May points to the example of the mature US market as setting a precedent for this year's trend in euros. "If you look across to the US market, you often see deals over there for less than $500m and there is a lot of appetite for them. As the European investor base becomes more sophisticated and confident in analysing and understanding credits, so the demand on their part for a certain minimum deal size for liquidity is diminishing to an extent."
One borrower to launch a smaller sized issue was Schiphol Airport, which accessed the market in late June via Lehman Brothers and UBS. The Aa3/AA Dutch corporate only required Eu300m, so despite building a book of up to Eu600m before official spread guidance had even been released, it kept its 10 year deal at the original size. The borrower was able to achieve a spread of 43bp over mid-swaps.
"There has been little issuance in this sector so investors may be attracted by the rarity value," said one syndicate manager.
Another noted how the issue exemplified the trend of smaller deals and said that in some cases a modest size might also indicate positive credit qualities. "This was another example of an issuer successfully bringing a transaction in less than what has become the benchmark size, Eu500m, which should continue to be a feature of the market going forward," said the syndicate official. "As companies continue to deleverage, they do not necessarily need to do large issues and investors are accepting that without needing a significant liquidity premium."
The hunger for new names has also enabled certain unrated credits to access the bond markets. While unrated issuance was frowned upon in many quarters after the introduction of the euro and appeared to be a throwback to the domestically oriented markets that existed before 1999, the credit skills that investors have gained since the birth of the euro credit market means that they are now more qualified to analyse unrated corporates.
"The institutional investor base is becoming more sophisticated and many have their own credit analysts who are able to do their own credit research," says one DCM official.
Nevertheless, many investors remain restricted to rated paper by the mandates they hold. "It is fair to say that even if an increasing number of accounts are willing to buy unrated credits, a high percentage of European institutional investors still cannot buy such paper even if it is the greatest credit and the cheapest spread in the world," adds the official.
Roche tests unrated waters
One corporate to guage the appetite of investors for unrated paper this year was Roche. The Switzerland-based pharmaceuticals company had made rare appearances in the bond markets before -in Switzerland and the US - but never in Europe. Instead, Roche had financed itself though innovative equity-linked issues and also by treasury management. However, the company has in recent years taken a more conservative approach to its finances and saw the opportunity to refinance some of its outstanding equity-linked issuance more cheaply through plain vanilla fixed rate bond issuance.
Roche approached the euro market for the inaugural issue off a newly established MTN programme in March via ABN Amro, Citigroup and Credit Suisse First Boston. Although the Iraq conflict had only just begun, the credit markets remained open. The issuer started out with a minimum target of Eu500m, but after attracting Eu1.6bn of orders increased the size to Eu750m.
The five year issue was priced at 42bp over mid-swaps and opinions on the pricing were mixed among syndicate officials. Some said that the spread was slightly aggressive, but fair, offering a premium to credits considered to be of a similar quality to compensate for the fact that it was unrated. But others said that given the name recognition that Roche enjoyed, it could have priced its transaction tighter. They pointed to the strong aftermarket performance of the deal to support their argument. On balance, the different opinions suggest that the pricing was probably right.
Roche then embarked on what was potentially a more challenging test of appetite for unrated credits when in late August it approached the sterling investor base seeking 20 year funding.
Some bankers and investors had voiced concerns that demand for unrated credits was thin. They argued that as well as suffering from missing out on investors that are prohibited from buying unrated bonds, the deal could also prove relatively illiquid, as a result of the lower number of potential participants in its secondary market and the modest size that Roche was seeking.
Such fears were, however, comfortably overcome as Roche attracted a book of £625m within hours of the books for its deal being opened by leads Barclays Capital and UBS. The corporate could therefore increase the size of its deal from £150m to £250m.
Pricing at 67bp over Gilts following guidance of the 70bp area was also possible.
Demand was boosted by Roche's premarketing efforts. The company had embarked on a two team, two day roadshow ahead of the deal, holding 20 one-on-ones and a lunch meeting. The corporate also restated the commitment to attaining a rating by 2005 that it had given ahead of its inaugural euro trade.
"This was the first time that we had showed ourselves in sterling, so there was no guarantee that the deal would be a success," a spokesperson for Roche told EuroWeek.
"However, we did a substantial amount of work ahead of the deal, spending a lot of time talking to investors in one-on-ones. The lunch meeting was very well attended and we had strong interest from high quality accounts, so by the time of launch we had the feeling that it could go very well."
Marco Baldini, a director on Barclays' syndicate desk, said the success of the issue showed the opportunities available to unrated borrowers in sterling, which might also not be able to raise such long maturities in euros. "Even if investors are discriminating in their choice of credits, the success of this deal shows the market is open for the right unrated names," said Baldini.
Bankers away from the leads agreed. "Although some fund managers' mandates preclude them from investing in unrated paper, there were plenty of others that were able to put in the credit work, assess the quality of the company themselves, and felt that the work was worthwhile," said one.
Roche was also able to achieve a level in line with rated peers. The 67bp spread put Roche only several basis points back from where Aa2/AA rated GlaxoSmithKline was trading in the 30 year part of the curve. Credit analysts opinions of Roche vary between strong double-A and strong single-A.
And the beat goes on
If the start of September is anything to go by, the euro market will continue to welcome new names to the market. In the first week of the month, for example, ISS Global, a Denmark- based facility services company, launched an inaugural Eu850m seven year issue via HSBC, Nordea and SG.
Other debut issuers due to tap the market include Spanish utility Red Eléctrica and Franco-Spanish tobacco company Altadis. There is even speculation that unrated Heineken is eyeing the market for a debut euro issue.