The much awaited development of the long dated end of the euro corporate market finally materialised last year when Olivetti launched a Eu400m 30 year bond in early January. It was later increased by a further Eu400m due to investor demand, as part of a multi-tranche Eu3bn funding exercise.
“The transaction was generated by reverse enquiries,” says Lorenzo Frontini, head of European credit syndicate at Lehman Brothers. “We had talks with investors about extending the duration of their portfolios at the end of 2002 and approached Olivetti with the idea. The company was very receptive, and a successful meeting between the CFO and one of the top accounts in December resulted in a relevant lead order for the deal.”
Together with a five and 10 year tranche, the deal was announced, oversubscribed and priced within 48 hours. The final book was in excess of Eu4bn, double the original deal size of Eu2bn.
Caboto IntesaBci, Goldman Sachs, JP Morgan, Lehman Brothers and Mediobanca were joint bookrunners for the deal.
Too much, too soon
Olivetti’s foray into the 30 year maturity was followed by France Télécom’s Eu1bn 30 year deal just five days later. As the first benchmark 30 year euro corporate issue, the latter is widely seen as the groundbreaking transaction.
BNP Paribas, Citigroup, Deutsche Bank, HSBC and Morgan Stanley, the joint bookrunners for the deal, told EuroWeek at the time: “The recent Olivetti 30 year transaction was priced 45bp over its 10 year bond in Libor terms. The France Télécom deal was priced at 38bp over its new 10 year, quite an achievement as many believed the correct curve from 10-30 years should have been 50bp.”
There was strong interest from investors once it was clear that the 30 year tranche was going ahead. Total books amounted to Eu3.25bn.
However, the issue did not perform well in the secondary market. The same fate awaited the other four 30 year transactions that all came before the second week of February — from RWE, Electricité de France, Deutsche Telekom and Telefónica. Investors, it seemed, had swallowed too much, too quickly.
RWE’s Eu750m deal was priced at a spread of 115bp over the Bund by bookrunners ABN Amro, HVB and Morgan Stanley. The issue initially traded in to 105bp but then widened to 145bp over.
Electricité de France’s Eu850m deal, which was led by ABN Amro, BNP Paribas and JP Morgan, came at 97bp over the Bund but traded as wide as 120bp over.
“It was a combination of so many issues coming at the same time, immaturity of trading and hedging of different issues, hot money accounts taking profits and volatile credit and equity movements at that time,” says Paul White, head of syndicate at ABN Amro.
Anthony Barklam, syndicate manager at Morgan Stanley, places the blame on poor execution. “The 30 year market is very immature and there is a general lack of understanding among certain underwriters about who buys these bonds,” he says. “In particular, the deal for EdF was packed with hot money, leading to profit taking that destabilised a market with no strong natural buyer base for support.”
However, Martin Egan, head of syndicate at BNP Paribas (one of the bookrunners for EdF), defends the deal. “It wasn’t investors on the book that shorted the deal, but arbitrage players and proprietary desk traders. We had over Eu2bn of orders and brought the deal at a price and size that was deemed right.,” he says. “We must bear in mind that the 30 year cash market in Europe is trading on a bigger bid/offer spread compared to its peer in the US, therefore it was the trend last year from secondary traders and other professionals to hedge their 30 year credit exposure via shorting other 30 year bonds rather than the underlying market. This has increased volatility in weak market conditions.”
GM re-opens market
Whether it was indigestion or just bad planning, the spurt of 30 year maturities came to an abrupt halt in mid-February. However, enough appetite and confidence had returned by the middle of the year for General Motors to issue a 30 year deal in June. Peugeot followed in September.
And Veolia Environnement was well received when it came to the market in November, enabling an increase of its deal from Eu500m to Eu700m. BNP Paribas, CDC IXIS, HSBC and JP Morgan, joint bookrunners for the deal, achieved a total book of Eu1.8bn even after the price revision.
As well as a second wave of issuance in the latter half of the year, January and February’s 2033 bonds began to tighten back in. By November, EdF had recovered to trade at around 75bp over Bunds, and RWE at around 82bp over.
In fact, some of the best performing bonds of last year came from the 30 year market.
However, the long dated market is only open to the strongest of corporate credits. This was demonstrated by the domination of telecoms and auto sector names, with utility issuers also making a good showing at 15 years and above.
“The market is still in embryonic stage, but the learning curve for both issuers and investors has been steep,” says Egan at BNP Paribas. “Last year was very constructive in that sense, and the longer part of the curve is now on the radar screen for frequent issuers as a sensible option to look at.”
A more mature outlook
Conditions for long dated issuance are expected to remain favourable for most of 2004.
“The market is here to stay and matured last year,” says White at ABN Amro. “We forecast interest rates to be on hold for most of 2004 and any increase thereafter to be gradual. Further flattening of the yield curve is expected, which means that investor demand should remain good. We anticipate similar issuance volumes in the 30 year sector going forward into 2004.”
|Timeline of Long Dated Issuance|
|Issuer||Launch date||Size (Eu)||Issue level*||Bookrunners|
|Olivetti Finance||10/01||400m**||301||Caboto, Goldman Sachs, JP Morgan, Lehman, Mediobanca|
|France Télécom||15/01||1bn||330||BNPP, Citi, Deutsche, HSBC, Morgan Stanley|
|Deutsche Telekom Int’l Finance||16/01||500m||268||Deutsche Bank, Citi|
|RWE||31/01||750m||115||ABN Amro, HVB, Morgan Stanley|
|Telefónica Europe||06/02||500m||122||ABN Amro, Barclays, JP Morgan|
|Electricité de France||07/02||850m||97||ABN Amro, BNPP, JP Morgan|
|General Motors||26/06||1.5bn||385||Bank One, Barclays, BNPP, Deutsche, Morgan Stanley|
|GIE PSA Trésorerie||04/09||600m||100||BNPP, HSBC, JP Morgan, SG|
|Veolia Environnment||18/11||700m||109||BNPP, CDC IXIS, HSBC, JP Morgan|
*bp over mid-swaps
However, the market needs more time to evolve before it reaches the levels of sophistication enjoyed by the US and sterling markets. One head of syndicate in London says: “It is interesting that 30 year bonds are still priced against 10 year bonds and not 30 year paper — it indicates that it is still a fledgling sector.”
“It is the borrowers that are lacking at the moment,” says Barklam at Morgan Stanley. “Many do not recognise the need for 30 year financing and still view the market simplistically as a higher spread and yield product than short dated debt financing. This is unlike the US and UK longer dated markets, which are mature and full of borrowers and are viewed by issuers to be quasi-equity and a natural match for long dated business infrastructures.”
Nonetheless, Barklam sees enormous potential for the long term euro market and says that he continues to have enquiries from investors for longer dated assets. He predicts that the changing pension provision arrangements in continental Europe, with the shift of responsibility from the state to other areas of the market, will further add to demand.
“Some French accounts perceive that longer dated needs should be catered for in the equity or real estate markets exclusively, but they fail to see that the bond market can offer diversification and stability, particularly against the recent volatility in equities and low returns in real estate of the last few years,” he says. “There is a specialised but rapidly growing investor base for them, and the strong performance of these bonds shows how deep and long term the investor base is.”
However, Suki Mann, a credit analyst at SG, is more sceptical. “Demand will be there if the price is right,” he says. “For example, in 2003 buyers wanted to lock into the attractive yields. But there is no deep natural investor base for the longer dated market — apart from the global funds.“
Neither does he think the changes in the pension scene will have much effect on issuance.
“The pension time bomb is ticking, but changes will take place over a five to 10 year time scale,” he says.