Corporate bond bankers remain split over how seriously the volatility surrounding sovereign worries is affecting the primary market. Some argued last week that excessive bearishness was unjustified, pointing to successful new issues from borrowers such as Finland’s Neste Oil. The state-controlled company, which has an implied triple-B rating, printed Eu300m of five year money last Monday, marking the first non-retail led deal from unrated issuer since April.
However, others are adamant that the corporate bond market is severely limited in its capacity to accept deals — and investors in particular are warning that syndicate desks are at times verging on complacency.
After overcoming the post-Lehman fallout, this is a market that has churned out record numbers of issues in the last 18 months without any serious hiccups. By the end of 2009, unrated, inaugural borrowers were raising bonds practically every other day, drawing unwavering support from yield-hungry investors. This trend continued well into the first quarter of this year, until the market ground to a halt even for more seasoned issuers in May.
But although triple-B and crossover names have in the last fortnight been able to access funding in the capital markets again, bankers may not be able to pick up where they left off just over a month ago. Investors are being far more selective, and this will make debut deals a lot more complicated.
The struggle to get an inaugural deal done last week for Corio, a Dutch property investment company, illustrated that it may not even be a case of pricing and premiums.
Corio’s misfires
BNP Paribas and ING postponed the issue after opening books on Thursday with a price whisper of 200bp-220bp over mid-swaps. This, the bookrunners said, was to amend the offering by adding a number of covenants investors had demanded — a process that was still being worked out on Monday, when accounts said they’d heard price talk at 240bp over. On Tuesday, the issue was officially pulled.
The handling of the issue drew harsh criticism from rival syndicate members, while investors bemoaned what some said was a lack of clarity surrounding a European roadshow, which was conducted quietly in the run-up to the issue.
But it was investors’ feedback on the credit itself which was the most telling. One, who said he knew the name well, insisted that he had no objection to the initial price talk or even the initial covenant structure — but that despite rating the company as a well-managed and interesting business, he would still not buy into the planned Eu500m deal. About 25% of Corio’s property portfolio, much of which consists of shopping centres, is in Turkey, Spain and Italy.
“We are nervous about the sector, and particularly in these countries,” said the official.
Corio’s mooted issue may not be emblematic of every debut out there — its execution appeared to be messy and it fell victim to a particularly volatile market backdrop last Thursday.
But a recent roadshow for unrated French real estate group Société Foncière Lyonnaise (SFL)’s inaugural bond has resulted in nothing for now, with the borrower opting to stay away from last week’s tumultuous markets and heading into blackout.
A year for debuts — perhaps
With much of this year’s supply to come from debut issuers, SFL and Corio’s experiences are deeply worrying for the corporate bond market.
Two months ago, syndicate bankers were complaining about crossover and high yield names attempting to get debut issues done with few covenants and at tight levels, in a bid to emulate so many of the aggressive deals others borrowers had printed earlier this year. This led to some fraught discussions between origination and syndicate desks, as well as with borrowers. But amendments to structures and terms was usually enough to ensure a deal eventually got done.
Now the markets are a lot tougher. RCI Banque’s treasurer told EuroWeek that the issuer’s successful Eu500m three year bond priced three weeks ago was one of the most difficult he had done in his life, “other than in early 2009”. With this kind of an environment to contend with — where even the best-loved credits are not attracting nearly half as much demand for their deals as they were a year ago — DCM and syndicate bankers will have to make sure the issues they are attempting to bring out for debut borrowers are watertight. This implies execution and timing have to be flawless, roadshows extensive, and investors’ qualms over the credit, covenants and secondary market support understood before even attempting to launch a deal. It also means that bankers need to temper borrowers’ expectations about what is now achievable, as well as their own, and shake off any prevailing complacency about how much investors are willing to digest. It may not be good for deal volumes, but failed deals would be even worse.