ating: Aaa/AAA Tranche 1: Eu2bn
Maturity: June 20, 2007
Spread at re-offer: 37bp over mid-swaps
Tranche 2: Eu1bn FRN
Maturity: June 21, 2004
Spread at re-offer: three month Euribor plus 18bp
Launched: Thursday June 13
Joint books: BNP Paribas, DrKW, Deutsche, Morgan Stanley
Bookrunners' comments:
BNPP - Obviously the European investor base is a key target for GECC and this transaction was extremely important for them. They had conducted an extensive European roadshow two weeks earlier, hosted by a number of banks.
We announced a Eu3bn-Eu4bn transaction on Monday morning together with Deutsche Bank and Dresdner, with price guidance of 30bp-35bp over mid-swaps.
Market sentiment at that time was not particularly strong. Equity markets were weak and, although we were building a decent order book, there was a lack of momentum in the deal. GECC was also printing transactions in the US and yesterday (Wednesday) they announced that, given the success of their extendable dollar FRN, they had decided to reduce the size of the euro deal to Eu3bn. Also, on the back of a reverse enquiry from Morgan Stanley, they said they were going to include a two year FRN in the transaction and add Morgan Stanley as a lead manager.
We therefore went back to the market with a maximum deal size of Eu3bn, comprising a five year fixed rate bond and a two year floater, without giving exact tranche sizes. Price talk was mid-swaps plus 37.5bp on the five year and Euribor plus 20bp on the FRN.
Momentum began to build quickly for both issues in an improved market environment and we closed the floater book mid-afternoon on Wednesday, keeping the five year book open until this morning (Thursday).
We launched the deal officially today as a Eu2bn five year fixed rate bond at plus 37bp and a Eu1bn two year floater at plus 18bp. The book for the floater totalled around Eu1.6bn and Eu2.6bn for the fixed rate tranche. Both issues were priced through the official price talk.
The floater book was dominated by money managers with a broad European distribution, while the fixed rate deal was distributed to asset managers and pension funds with Germany, France, the UK and Holland as key regions.
The transaction broke syndicate today and both tranches have traded a basis point tighter.
This is GECC's largest euro financing. Their only outstanding deal of notable size in the euro market is a Eu1.5bn seven year bond, which at the time of launch was trading in the very low 30s to mid swaps.
Deutsche - The original intention was to launch Eu3bn-Eu4bn of a fixed rate bond, but the success of the extendable dollar floater and the 30 non-call five issue launched in the US put GECC ahead of its funding targets and the fixed rate bond was reduced to Eu2bn.
In addition, because in this type of interest rate environment floating rate product is in great demand and Morgan Stanley encountered some of that demand, they leveraged into the deal and we also printed a Eu1bn FRN.
Five years is a long maturity for GECC and a two year issue at that price was very interesting to them. They therefore opted to split the deal into two tranches.
The original price guidance on Monday morning for the five year was 30bp-35bp. Overall the market is weaker across the board, predominantly because of telcos and the weakness in equity markets, and the pricing was moved with the market.
GECC is obviously a frequent borrower, but in Europe this is the first time they have done a large, liquid benchmark trade that institutions will care about for liquidity reasons and clearly they wanted the deal to work well. We therefore ended up pricing behind the guidance at 37bp over mid-swaps.
One would have expected distribution of the two year to be dominated by banks. In fact, fund managers accounted for 62% and banks just 28%, with central banks, insurance companies and pension funds taking up the balance.
Geographically the split was 25% France, 25% UK, 10% Spain, 12% Italy and 12% Japan.
The five year was driven primarily by the UK with 20%, followed by Germany with 16%, the Netherlands with 15%, Asia with 10% and Spain with 6%. Funds again dominated the book, accounting for 45%, with banks taking 35% and insurance companies 10%.
The floater was marketed at the 20bp over area and was priced and sold at the re-offer spread of Euribor plus 18bp,
The five year was slightly more expensive for GECC than they could have achieved in the US, which is not unusual for double-A and triple-A borrowers who tend to pay more over Euribor. But I would say that the cost of funds was certainly competitive for the company.
GECC had done a lot of marketing before launching the issue - a non-deal roadshow several weeks ago with Morgan Stanley and a conference call. The company is making a concerted effort to market itself more aggressively to the fixed income investor base and that has gone down very well.
There are obviously supply issues with GECC but they alleviated that by saying that they may not come back to the euro market this year and, if they do, it will not be until the fourth quarter.
They are now ahead of their funding targets but need another $20bn-$40bn this year. However, given the ease with which they can still access pockets of money in the US, in yen, in MTNs and in the floater market, that is actually not a difficult number to achieve.
The borrower's goal was to diversify their investor base and they have done that by finding fixed rate buyers as well as floater buyers, and they are very happy with the number of clients in the order book. They have appealed to two very different pockets of money with the two different maturities.
The five year has freed to trade at 56bp over the Obl having priced at plus 56.5bp and the floater, which has not traded, is re-offer bid.
DrKW - This is the second euro deal of significant size launched by GECC this year following the seven year fixed rate bond that was increased from Eu1bn to Eu1.5bn and it is their largest transaction in the sector.
After an initially slow start, we were able to put a successful deal together, which was significantly oversubscribed going into pricing.
Given the success of both the $6bn extendable FRNs and the $500m retail note issued in the US, GECC decided to reduce the euro transaction from Eu3bn-Eu4bn to Eu3bn. The dollar issues put GECC ahead of its funding target and, to better match fund its asset portfolio, the company decided to reduce the size of the five year tranche and add a two year FRN. There was some reverse enquiry for the FRN and that brought Morgan Stanley in as a fourth bookrunner on the transaction.
Both tranches were extremely successful. On the floater, we went out with price talk of Euribor plus 20bp and priced at plus 18bp as the book was almost 100% oversubscribed.
The most important areas of placement were the UK with 26%, France with 15% and Italy with 10%-12%. There was particularly good demand from banks and funds.
The five year was also well oversubscribed and distribution was very broadly spread, the key areas of placement being Germany with 17%, Holland with 14%, UK and Ireland with 20% and Asia with around 10%. Banks participated in the book, together with a number of central banks and funds.
Pricing at 37bp over mid-swaps looked good value against GECC's five year dollar bond, which had traded in to mid-swaps plus 26bp-28bp from a launch spread of plus 33bp. The 2009s we brought earlier in the year were trading 31bp-29bp so there was a new issue premium involved, which investors have come to expect for GE paper this year. The issue has tightened by half a basis point in the secondary market.
Morgan Stanley - We had a reverse enquiry from an investor for a very material chunk of two year paper and GECC said that, having done an extensive roadshow, they would like to add a two year floater to the deal to appeal to money market funds as well as fixed rate investors. By virtue of the enquiry, we were added to the group of lead managers.
By including the two year floater, the borrower was able to reduce the size of the five year issue and that added momentum to the process.
GECC is now well ahead of its funding target for this point in the year as Salomon has led a 30 year non call five issue in the US, which was bigger than expected. The extendable FRN led by Merrill Lynch and Morgan Stanley was also bigger than expected and the size of the recent Samurai issue exceeded initial targets.
The two year issue was launched on Wednesday morning and the book was closed by lunchtime at Eu1.9bn, so that transaction absolutely flew. There has been a shortage of short dated issuance as a lot of corporates are paying down CP, which has left a surfeit of cash available in money market funds and this issue took advantage of that.
Having closed the books at Eu1.9bn, we were able to tighten price guidance from 20bp area to a definitive spread of Euribor plus 18bp. Every single bond sold at plus 18bp and the issue is trading 18bp-17bp right now (Thursday evening).
Distribution was broadly spread. A lot of London money market accounts were involved and there was very good sponsorship from France, Germany and Scandinavia. There were 130 tickets in the trade.
The issue provided GECC with reasonable funding. They trade in the low to mid-teens in dollars and this paid a small new issue premium.
The book for the fixed rate issue was Eu2.75bn. It was extremely high quality with a high percentage sold into European bond funds. Geographically it enjoyed major sponsorship from France, Germany and the UK, benefiting from the roadshow they did in those three areas. There was secondary sponsorship from the Benelux and some of the Asian central banks as well.
This tranche also provided GECC with reasonable funding. Because of oversubscription, the price was tightened slightly from 37.5bp to 37bp. GE dollar paper trades in the range of mid- to high 20s to mid-30s so again the five year tranche paid a small new issue concession to the borrower's dollar paper. The five year is trading 36bp-35bp to swaps having priced at 37bp.
One interesting aspect of the five year book is that there were in excess of 270 individual orders in the transaction. That says two things - the big anchor orders from the European funds that GE met on the roadshow were all in place and the history that GE has in the European markets of issuing retail trades means that there is phenomenal sponsorship from smaller institutional accounts. There were a lot of Eu1m and Eu2m tickets in the book.
It has been a tough week because of depressed equity markets and a generally softer bond market but, having done a European roadshow, GECC were keen to get a deal done. They achieved that goal with an issue that was oversubscribed and has performed well because they paid the correct market clearing level and hats off to them for that.
Market appraisal:
"...a rather confusing process. First of all there was a rumour that GE would try to do a huge amount in euros, more in fact than they had just printed in dollars. So when they announced that they were doing a maximum of Eu4bn, the market was extremely relieved. The price talk at that stage for a five year fixed rate bond was mid-swaps plus 30bp-35bp, which we thought was more than fair.
The deal clearly failed to get any momentum behind it, however. I think that everyone was concerned about the supply from GE because of how much they have to do in the market.
It seemed to take a long time to get any momentum going and they had to widen the price talk to 37.5bp over mid-swaps. But the classic twist came in when the deal changed shape completely.
Having done some $7bn of issuance in the US including a resettable puttable FRN for $6bn, which had a $13bn order book, and a $500m 30 year non-call five retail issue that was increased to $1bn GE came to Europe and said: "As we have done so much in the US, we are going to scale back the euro." Then Morgan Stanley showed them a two year FRN, which gave GE the opportunity to scale back the Eu4bn five year fixed rate bond, which they would have had to print at a wider level. At this point they added Morgan Stanley as a bookrunner because they reportedly had a large lead order for the floater.
The two year floater flew out of the door. We were sitting on a large number of orders from people who wanted to buy GE short dated paper and that gave the whole trade momentum. In fact, it probably saved it. Everyone wanted a piece of the FRN and, if they couldn't get bonds, they agreed to go into the fixed rate tranche.
Considering that GE has a lot of funding to do, I think they went the wrong way about it. They said they were going to do a big fixed rate euro but, as their funding in the US had gone well and they were ahead of targets, they scaled back the size and I believe investors must have been bemused by all this, especially the big European investors that had done their credit work and had attended the roadshow..
Both tranches have tightened marginally after the break, but have effectively closed unchanged on the day because the market has rallied massively today (Thursday).