You can make your own luck — if you’re lucky
Bond market opportunities are there, for the issuers investors like
Tennet, the Dutch electricity grid company, is not often listed as one of the European bond market’s most exciting issuers. Consistent, steady, reliable, yes. Solid ESG credentials, yes. But it has rarely caused the market to change its mind.
This week, it surprised corporate bond players in several ways at once. In a tricky week cluttered by a holiday and US and UK central bank policy announcements, it slipped in through the only gap, on Tuesday, with a deal twice as big as any it had sold before.
The €3.85bn four tranche issue would have been considered enormous a few years ago. Now, the euro market can handle that with ease. But it still broke a record. It was the biggest ever corporate green bond, and pushed Tennet to the top of the corporate leaderboard for all time green issuance.
Well informed observers reckon Tennet has issued all the paper it will need to this year. The largest corporate issuers in euros — often US companies — commonly do deals of up to €7bn or so now. But they have huge funding programmes.
For an issuer Tennet’s size, which needs about €4bn, to do the whole lot in one go is very unusual in Europe, if not unprecedented. The company and its advisers had spotted that deals of this scale and style, unremarkable in the dollar market, are now quite feasible in euros for good quality issuers like A3/A- rated Tennet.
It may not be the way to guarantee the tightest spreads — the new issue premiums ranged from low teens to high 20s, at least some of which was attributable to the size.
But if the aim was to take away any funding worries for the year so Tennet could get on with its investment programme — and avoid paying what could very likely be higher rates later this year — it worked.
For corporate bond specialists, the real jewel, however, was the deal’s 20 year tranche. Bankers away from the deal were quick to underline that Tennet had paid up for it. It was priced at 110bp over mid-swaps, 35bp wider than the 11 year tranche alongside, and yielded 2.87%. The new issue premium was between 20bp and 25bp, a banker on the deal said.
But even rivals were elated to see the first corporate 20 year in euros for six months. With interest rates expected to rise, the orthodox view has been that investors did not want duration. Euro corporate issuers of all shapes and sizes have not strayed beyond 12 years since the autumn.
Tennet is a safe and trusted issuer in a sturdy sector — but no bond market darling or trophy name. Tuesday was a good day to issue, but investors’ expectation that rates will rise is no weaker than it has been any time this year — in fact, it is probably stronger now.
Yet along Tennet came and picked up a 20 year tranche — €850m, no less — as if it had been lying on the pavement. The option might have been there for the taking for other single-A rated issuers all along.
Finding good opportunities can be about daring to try.
But there is a rider to this uplifting self-help story. For issuers rated triple-B and below — especially in high yield territory — this year is not one in which they can make their own luck.
When they come calling, investors tend to look the other way. Getting their attention requires having the fortune to catch them at a good moment, getting the pitch absolutely right, and offering plenty of inducement — in ready cash.
Miller Homes, which got a £425m and €465m high yield bond away last week by paying 650bp over Gilts and 525bp over Euribor, may count itself lucky. But it’s a different kind of luck.