Tight credit spreads and rising rates are fueling expectations that a corporate issuer could sell a 12-year floating rate transaction in the European market by year-end, according to syndicate officials. The expectations come as demand for longer-dated FRNs has increased significantly since the beginning of the year, prompting a flood of seven-year corporate issuance since February and the first 10-year corporate FRN in July. They said a longer floater would be an important development in the maturation of the European fixed-income markets.
"Fund managers are getting comfortable with 10-year FRNs and we could see a 12-year FRN by a corporate before the end of the year," said a syndicate official at Lehman Brothers in London. Lehman was joint lead on GE Capital Euro Funding's E500 million inaugural 10-year FRN two weeks ago.
Corporates are less frequent issuers of FRNs than governments and banks, because the investor base for corporate FRNs is not as deep. That said, the appeal to corporates of issuing FRNs at lower spreads than fixed-rate notes is clear and as investors look for rate protection and yields, the issuance of longer-dated FRNs should increase, predict sell-side players.
Not all investors are chomping at the bit. Richard Hodges, senior investment manager at Gartmore Investment Management in London, said he does not expect European Central Bank interest rates to rise and any likely rate hikes by the Federal Reserve in the U.S. are already priced into the market. "At 24bps over EurIBOR, the GE Capital 10-year FRN did not offer enough of a return to be attractive," he said. Hodges did not participate in the deal.
Nonetheless, issuance of FRNs of all maturities in 2004 has grown more than 100% since last year. Seven-year floating rate notes made their debut in Europe in February, and over E15 billion in this maturity was issued by banks and corporates before Merrill Lynch opened up the 10-year euro FRN market with its E1.4 billion floater in mid-July.
