Corporate credits are becoming an increasingly familiar sight
in the Euro-French franc market as investors seek portfolio
diversification and yield pick-up at a time of low rates and
issuers seek an alternative, and cost-effective, source of
financing to bank debt.
High yield issuance is picking up steam, while household name
corporates have also tapped the market to impressive effect in
recent months. Is this the new growth area?
Once dominated by triple-A and double-A paper, the Euro-French
franc sector is rapidly opening up to a wide range of corporate
credits that - until recently - could not have dreamt of tapping
the bond market.
The turning point came last July when Bankers Trust and Crédit Lyonnais launched a Ffr300m five year issue for Moulinex, the white goods manufacturer.
"The CEO and CFO of Moulinex came to us because they wanted to restructure their debts and raise Ffr2bn of new money," recalls Jean-Louis Grevet, managing director at Bankers Trust in Paris.
"Their commercial banks were willing to provide Ffr1.2bn and their shareholders would not put in more than around Ffr500m, so they had a gap of Ffr300m that they needed to finance. The objective was to create a piece of paper that would provide some comfort to the banks."
The deal that resulted was the first high yield issue for a French borrower, as well as the first such issue in French francs. It was five times oversubscribed at its re-offer level of 220bp over Pibor.
Moulinex, which was regarded by bankers as an implied double-B credit, paid up for the privilege of opening the market - and the 220bp level for senior debt provided a rare high-yielding product for investors looking for enhanced return.
When Morgan Stanley Dean Witter brought the second such deal - a Ffr550m senior subordinated FRN for Neopost - the pricing was only a little wider for a security that most bankers regarded as much more aggressive. The 10 year deal, which is callable after a year, paid 237.5bp over Pibor.
The third French high yielder of 1997, for a chain of shoe shops called Groupe André, continued the trend of increasing issue size and declining spread.
The five year deal, which was led by Merrill Lynch and Crédit Lyonnais, totalled Ffr900m and was priced at 150bp over Libor, the bottom of the range at which it was pre-marketed.
One investment banker involved in the deal concedes that much of the demand for the deal came from commercial banks. The transaction could be regarded as a tradable syndicated loan.
The three high yield deals launched in French francs of 1997 raised a combined Ffr1.75bn, a figure dwarfed by the volume of debt raised by companies sitting on the better side of the investment grade divide - but equally new to the bond markets.
One such deal came in late October 1997, a Ffr990m seven year issue for Ciments Français via bookrunner Société Générale and joint lead Lehman Brothers. Although unrated, the issue was priced as an implied triple-B credit at 55bp over interpolated OATs.
"It was a turnaround story," recalls Nicolas Pourcelet, head of capital markets at Lehman Brothers in Paris, which with Société Générale organised a series of roadshows to explain to investors that the company had recovered from financial difficulties in 1991 and 1992.
"We emphasised that this is the second largest construction materials producer in France with a very solid group of clients."
The trickle of such issues in 1997 turned into a flood in the second half of April this year.
Pechiney, the aluminium producer, issued a Ffr1.5bn seven year deal at 47bp over interpolated OATs via BNP and Crédit Agricole Indosuez.
It was followed the next week by Casino, the supermarket group, which launched its first ever bond issue, a Ffr2bn five year deal via BNP and Crédit Lyonnais at 43bp over the BTAN curve.
Another debutant came the week after: Pinault Printemps Redoute, the largest non-food retailer in France. Its Ffr2bn issue was led by BNP and Crédit Agricole Indosuez. None of the three companies sought ratings.
"Demand is strong because interest rates are very low and because investors are seeking spread to compensate them for the low absolute level of rates," says Eric Hottelart, head of new issues at Crédit Agricole Indosuez. The same applies to the borrowers, which have locked in funding at interest rates close to 5%, a historically low level.
Asset swappers, including banks from the rest of Europe, played an important role in the placement of all three deals.
While these issues offered household names, even stronger evidence of French investors' willingness to take greater risk came on April 15 when Crédit Lyonnais launched a Ffr800m 10 year issue for Olsten Corporation.
Here was a US company that few French investors had ever heard of - normally enough to put a halt to any issue targeted at continental European investors.
Worse still, Olsten was downgraded by Standard & Poor's from A- to BBB+ just before the deal was launched. Nevertheless, the offering worked well at 115bp over 10 year OATs.
"The maturity is one of the most interesting features of the deal and shows one of the strengths of the French market," said a Crédit Lyonnais official at the time. "There are few other markets where a triple-B rated corporate could raise such long term funds."
The key question for French bankers, particularly post Emu, is how many French corporates will mandate them for bond issues - or how much French issuers will resist the temptations of US investment banks.
The first three high yield debt mandates for French borrowers fell to US securities houses, albeit with Crédit Lyonnais working as joint lead on two deals.
Although US investment banks cannot import know-how from the US without adaptation, their experience gives them a clear advantage over most French investment banks, several of which are just starting to set up credit research departments.
That will be especially true for high yield product, as that market develops to include a wider range of transactions. So far, the three deals have amounted to refinancings for mature businesses. US bankers are looking forward to extending the use of high yield debt to finance takeovers and start-up companies. EW