The Eu1.06bn transaction is expected to be heavily oversubscribed when lead managers Barclays Capital, Citigroup, Dresdner Kleinwort and UBS price it later today, even though the bond may soon have junk ratings.
But though the deal has been a success, it demonstrates how little consensus there still is in the corporate debt market on how to price hybrid issues.
Corporate bond specialists on both sides of the buy/sell fence offered widely differing views of the deal's true value — an estimate made particularly difficult by the market's volatility.
The A3/BBB+ rated company is issuing the long awaited bond to help refinance its £8.2bn takeover of UK industrial gases group BOC.
Linde and its leads picked a good week to bring the euro and sterling transaction. Spreads on hybrid bonds have tightened by as much as 80bp since Monday.
Yesterday evening, as EuroWeek went to press, the deal was thought to be six or seven times subscribed, and pricing was expected to be at the tight end of the ranges.
"This trade will be a blowout," said a banker close to the deal in London. "Interest has been fantastic for this, even after we tightened the guidance. Barring an international disaster, we will bring this ahead of the US non-farm payrolls tomorrow [Friday], at the tight end of guidance."
The syndicate began by suggesting that the deal's two tranches would be a Eu750m piece at 325bp-350bp over mid-swaps and a £200m sterling bond at 358bp-383bp over the 2015 Gilt.
However, yesterday (Thursday) afternoon the leads tightened guidance for both tranches and changed their size. The euro piece was cut to Eu700m and offered at 312.5bp-325bp over, while the sterling note was increased to £250m and the range lowered to 345bp-358bp. Both parts have a 60 year non-call 10 maturity.
Rival bankers suggested the initial guidance was generous. "It is very cheap and represents great value for investors," said one. "It is at least 25bp back of where it should have been priced.
"But the market has been wobbly and we are in a buyer's market — issuers cannot afford to be to choosy about the last basis point when it comes to acquisition financing."
Investor angst
Despite bankers' claims that the deal had been priced too cheaply, several investors bemoaned the spreads as too tight.
"A few weeks ago, this was being talked as coming at 350bp over," said Richard Hodges, a senior investment manager at Gartmore in London. "Even at 325bp over it was trading at minus 10bp/minus 30bp in the grey market. Now that it is at 312.5bp over, it is trading at minus 5bp. They have taken all the performance out of the deal."
Other accounts echoed the same complaint. "We are not buying it," said David Averre, a senior analyst at Insight Investment in London. "At the revised levels, we are simply not being compensated for the volatility in this market. Bayer has moved in and out by 100bp in the past two weeks. Linde have, frankly, been lucky — it would have been a lot wider than this a fortnight ago."
Linde's outstanding hybrid bond, a Eu400m transaction issued in June 2003 via Citigroup and Deutsche Bank, was trading at 260bp over mid-swaps when price guidance on the new transaction was announced.
Moody's and Standard & Poor's have said Linde's credit rating would be cut when the takeover of BOC went through.
Linde's senior debt is rated A3/BBB+ and its hybrids — new and old — Baa2/BBB-. All those ratings are on review for downgrade.
That would give the hybrid bonds a speculative grade rating, something the leads were keen to portray in a positive light.
"Who would have thought that the first sterling hybrid issue would have come as a sub-investment grade bond — that is a great achievement," said one banker.
In issuing a high yield hybrid bond, Linde follows borrowers like Italian lottery company Lottomatica, which issued a Eu750m deal rated Ba3/BB earlier this year to help pay for its takeover of US lottery machines group Gtech. That deal has been one of the better hybrid performers during the choppy conditions over the past four weeks.
However, the volatile nature of subordinated instruments led some investors to question the benefit of buying the Linde bond over an ordinary high yield bond.
"The Linde credit story is good," said Averre at Insight. "But if you want yield, you are better off looking at the straight high yield market. I may be proved wrong, but before long you will be able to pick these bonds up at wider levels in the secondary market."
Sterling flyer
Despite investors' caution, most syndicate bankers away from the trade were complimentary about the deal.
"It was cheap, but it had to be," said one. "But it is a great trade for the sector — the sterling deal is a flyer and will hopefully open up that part of the market. They have been lucky with the timing, but it will go down as a good transaction."
The sterling tranche has benefited from a solid amount of real money accounts placing orders, while about 65% of interest for the euro deal is from hedge funds. The leads will allocate bonds this morning when the books close.
The euro tranche contained a conversion clause that will allow investors to put the bonds if Linde's outstanding convertible bond changes to equity between 2007 and 2009. The put will be priced at the re-offer spread minus 112bp.
Most investors were pleased by the extra protection on offer, but others complained that the sterling bonds did not contain the same provision.
The hybrid will qualify for 50% equity treatment from Moody's and an intermediate equity rating from Standard & Poor's. It will rank pari passu with the company's existing hybrid issue.
Coupons on the bonds will be deferrable at the discretion of the issuer, but any interest in arrears must be paid if Linde subsequently pays a dividend on its equity.
The bonds will also include a change of control clause, giving investors a put option at par or a 500bp step-up in the event of a buy-out that leads to Linde's senior ratings falling below investment grade.
Linde also announced two weeks ago that it would enlarge its share capital by Eu1.835bn by issuing 37.068m new shares at Eu49.50 each in a rights issue. Shareholders will get two new shares for every seven held. Holders of Linde's 1.25% convertible bond will also be eligible.
Alistair Dawber
