What’s in a pulled deal?
Pulled deals are traumatic for those involved but unlikely to derail European corporate bond issuance while the European Central Bank is still buying the market.
Deutsche Lufthansa’s pulled trade on Monday has prompted some hand-wringing this week, especially in light of abandoned deals in other markets, such as NordLB's proposed seven year. But while a valuable reminder of the importance of "the 30%" (the required proportion of real, non-ECB investors) it’s hard to get too gloomy about Lufthansa’s failed transaction.
It is worth remembering that Lufthansa is the third corporate to have pulled a primary deal from the market since the European Central Bank began its Corporate Sector Purchase Programme on March 10.
Transurban Queensland and Altrad both abandoned deals after announcing them to investors this year. Indeed, Transurban pulled its transaction right at the beginning of the market’s seven month purple patch, in the first week after Mario Draghi announced CSPP.
What makes those two cases different is the backdrop against which they were pulled: on busy issuance days amid a heady bull market.
Lufthansa dropped its deal on a much gloomier day, with falling equity markets, oil price volatility and Deutsche Bank woes providing a mini-replay of the existential angst that left primary markets barren in January and February.
But like Transurban Queensland and Altrad, the details of Lufthansa’s pulled deal, a higher risk credit pushing too far on pricing, give a more convincing explanation for its failure than a drastic shift to a risk-off market. While the ECB buys corporate bonds in size there is a very strong technical underpinning tight pricing conditions in the market, meaning even when a borrower pushes pricing too far it can't upset the fundamental supply and demand balance.
Only the most naïve would boast that the ECB has made the corporate bond market indestructible. But the CSPP-led issuance run has already faced more severe tests than Monday, such as the UK’s vote to leave the European Union, and proved resilient. It is hard to see this week as a turning point in the grind tighter on spreads, though comments like that can easily be a hostage to fortune.
The ECB can buy up to 70% of a primary transaction and if this year’s pulled deals have taught any lessons, it is the importance of printing a deal that is at least halfway palatable for the real money accounts making up the remaining 30% of orders, especially as the ECB is unlikely to ever be allocated the maximum percentage it is mandated to buy.
With the ECB widely expected to stay in the market beyond March next year, issuers are set to enjoy tight pricing for some time yet.
But while most issuers will benefit from those conditions, all should be aware that in an artificially compressed spread environment investors will rightly use any hint of volatility to tilt a deal in their favour.