The issuer was able to successfully sell three tranches with 4.25, seven and 12 year maturities, but was unable to print the 20 year tranche.
Bank of America Merrill Lynch, Goldman Sachs, JP Morgan and Morgan Stanley set pricing on the 20 year tranche at 110bp over mid-swaps, indicating that it would be a €300m-€500m print, but later announced that the tranche would not be issued.
Some bankers away from the deal questioned the decision to launch a jumbo trade — particularly one with a long dated tranche — early on a Monday morning after a week with European holidays. Last Thursday was a public holiday in many European countries for Ascension Day.
“A lot of the target investors for this deal will have been out of the office on Thursday and Friday,” said a syndicate manager away from the deal. “If you’re a big insurance investor, you have morning meetings to deal with and rates moves to catch up on. You need to evaluate your portfolio after two days out of the office. What you don’t want to see is a big four tranche deal from an issuer that’s only done modestly sized single tranche euro deals before.”
Others blamed the failure not on poor timing, but on a poorly judged price.
“I have to say, if you look at the curve, the 20 year didn’t seem to offer enough,” said one syndicate manager. “Thirty basis points of pick-up from 12s to 20s is just too flat. I think with 5bp-10bp more of pick-up they would have got over the line.”
Others were less critical, pointing out that McDonald's was still able to get three tranches away successfully.
Victim to volatility
Bankers close to the deal said market volatility, coupled with company-specific factors, made the 20 year a tough sell.
“The recent movement in rates means the market has been volatile, which has been most severe at the long end,” said a syndicate banker involved in the deal. “Add to that that McDonald's has announced weak results, been downgraded and announced a share buyback. The euro market has seen a fair bit of 20 year issuance in the last 18 months, but a combination of factors meant it didn’t work today. The company wanted a €2bn deal, which they got, and they’re pleased with the pricing of the other three tranches.”
While the 20 year tranche was pulled, the other three tranches were successfully sold — though the leads were unable to tighten pricing from initial price thoughts. One banker away from the deal suggested that the issuer had lost price leverage when it was forced to pull the long dated tranche.
The lead managers priced the €600m 12 year at 80bp over swaps, in line with initial price thoughts of 80bp area.
The spread on the €800m seven year tranche was set at 55bp over, at the tight end of guidance of 55bp-60bp over.
Finally, the €600m 4.25 year floating rate note was priced at 30bp over quarterly Euribor, at the tight end of guidance of 35bp area.
McDonald’s is rated A3/A-/BBB+. It has been downgraded by all three major rating agencies in May, having begun the month with ratings of A2/A/A. All three agencies made reference to McDonald’s plans to return $8bn-$9bn to shareholders through dividends and share repurchases in 2015.
The agencies expect the repurchases to result in higher leverage at the company, with S&P projecting a debt to Ebitda ratio of 2.4 in 2015, up from 2 before the plans were disclosed.
McDonald’s CEO Steve Easterbrook announced the plans on May 4.
Undeterred by pushback in the euro market, the issuer is also in the market for dollar debt on Monday afternoon, opening books for five, 10 and 30 year tranches through the same set of lead managers.
Fatigue seeping in
United Technologies, the US defence company, was also in the market for its debut euro deal on Monday, opting for an eight year print through BAML, Deutsche Bank, HSBC and JP Morgan.
The leads priced the €750m eight year at 57bp over mid-swaps, the tight end of guidance of 60bp area and initial price thoughts of 65bp area.
The pipeline for US-issued debt in euros swelled further on Monday morning, as Illinois Tool Works mandated BAML, Citi and JP Morgan to arrange an investor call at 1pm on Monday afternoon, with a possible dual tranche deal with a long dated tranche to follow.
Some bankers away from the trade were critical of the decision to announce a long dated deal while McDonald’s 20 year tranche was struggling.
“Why would you commit another borrower to a long dated tranche?” asked a syndicate banker away from the mandate. “Our understanding is that they were looking for a 15-20 year deal. Why do you commit them to that when you haven’t got today’s deal done?”
Others suggested that Illinois Tool Works, along with other US issuers, might need to recalibrate its pricing expectations in light of volatile markets and an abundance of US-issued debt in recent weeks.
"I don't think we're at the point where there's investor fatigue for US issuers," said one London syndicate manager. "But they are going to need to offer more of a premium."
Simon Property, the world’s largest publicly traded real estate company, is also set to look at the euro market, announcing on Monday that it had mandated Barclays, BAML and BNP Paribas to arrange European investor meetings beginning on May 26.
Eli Lilly, Expedia, Harman International Industries and Time Warner have also recently roadshowed ahead of possible euro deals.