Spread trumps all in corporate bonds
A tale of two deals shows what investors really want
European investors showed corporate bond issuers this week that they will turn up to your meetings and you can do everything you can to please them, but if the spread isn’t right then they don’t care.
When markets are less than booming, there are a handful of tactics corporate treasurers can employ to ensure their deal gets a warm reception.
Take Mobico, the UK bus company that used to be called National Express. When preparing for its debut euro bond this week, it played a lot of the right cards.
Mobico marketed the deal for three days, by mandating on Friday and opening books on Wednesday — plenty of time for investors to do the credit work and ask questions.
Indeed, more than 90 of them engaged in the process, according to a banker on the deal.
On the big day, Mobico didn’t ask too much of the market: it tied down many of the variables from the off, opting for a €500m no-grow eight year trade.
And yet, it received a final book of just €575m.
Mobico is a bit of a tricky credit. Although rated a healthy Baa2/BBB by Moody’s and Fitch, it is a rare issuer. This tends to make its bonds illiquid, as investors come into the notes with a ‘buy and hold’ mentality.
On the same day, ELO Holding, which owns French supermarket chain Auchan, brought a €750m 5.5 year (March 2029) deal. Investors have a list of qualms about the credit, including exposure to Russia and the fact that it does not offer a coupon step-up if it is junked, even though it has just one rating, of BBB-. Yet unlike Mobico, ELO got more than twice the orders it needed.
What was the difference between the deals? ELO started marketing at an eye-popping 300bp over mid-swaps and ended at 278bp, including 30bp of new issue premium. Mobico started at 190bp over mid-swaps and cut to 175bp. Hardly stingy, but at that level, most of the fast money pulled out of the book.
Borrowers can do everything right in the run up to opening books, but, ultimately, investors' attitude boils down to a brutal "Show me the money."