From a fundamental perspective, CRH scarcely counts as an Irish credit. But Ireland was not going to let a detail like that get in the way when the building materials group re-opened the market for Irish-based corporates in January 2012. The €500m seven year transaction, led by Citi, ING, RBS and Société Générale was the first issue from an Irish corporate borrower since February 2010.
Ireland is no more than a modest part of CRH’s business. While central and eastern Europe accounted for 40% of its Ebitda in 2012, and Switzerland, Benelux and Finland for a further 45%, Ireland and Spain contributed just 5%. And with domestic cement sales down 17% last year, the Irish contribution appears to be declining.
Nevertheless, the fact that CRH is headquartered and listed in Dublin clearly means it is technically an Irish issuer, which made investors’ response to its trade at the beginning of 2012 all the more impressive, with 280 accounts generating an order book of close to €4bn.
A more appropriate test of true demand for Irish corporate risk, say bankers, came at the end of August, when the country’s state-owned utility, Electricity Supply Board (ESB), returned to the market with a €600m five year benchmark led by BBVA, Danske Bank, Deutsche, RBS and Société Générale. The best part of six months in the making, having originally been roadshowed in March, the EBS transaction was worth the wait, with a book of about €2.8bn from 228 investors allowing for the issue to be increased from an originally planned €500m minimum.
ESB priced its August 2012 transaction at 590bp over Bunds, which was the tight end of guidance, and represented a spread to the Irish government curve of about 110bp. “For investors who believed in the Irish recovery theme, the ESB deal offered a good way of buying into the story with a yield pick-up,” says Paul Gregory, head of corporate origination at Danske Bank in Copenhagen.
Sentiment sea change
It was a measure of how quickly sentiment towards Ireland changed in the last quarter of 2012, however, that by the time ESB returned to the market, three months later, the spread to Germany had tightened to below 330bp.
That allowed ESB to print a €500m seven year issue in November via Bank of America Merrill Lynch, Barclays, BNP Paribas, HSBC, RBS and Société Générale at a spread of just 320bp, with the order book reaching €6bn from 375 investors.
The momentum created by this demand allowed the gas supplier and distributor, Board Gáis Éireann, to follow ESB into the market a few days afterwards, with very similar results. With the ESB issue having tightened to well below 300bp, Board Gáis was able to price its €500m five year deal, led by Barclays, BNP Paribas, Danske, HSBC, RBC and RBS, at 275bp, with demand swelling to €6.5bn.
Granted, both ESB and Board Gáis were given a big helping hand by the ECB’s outright monetary transactions announcement. Nevertheless, both were also instrumental in helping to rebuild Ireland’s credibility in the international capital market. “True, ESB has some activities in the UK and Northern Ireland, but it and Board Gáis are Irish risk through and through, unlike CRH which is a multinational that happens to be based in Ireland,” says Danske’s Gregory.
The strength of demand for both issuers was perhaps all the more remarkable, says Gregory, in light of two potentially negative elements for their credit stories. The first was the discussion, given plenty of air-time in the press, about possible asset sales in Ireland and the perceived candidacy of both companies for at least partial privatisation. “That discussion was not particularly helpful given that the companies were both presented to the market as being almost 100% government-owned,” says Gregory.
The second was the perceived vulnerability of the Irish sovereign rating in the fourth quarter of 2012. “Although both companies enjoy a ratings uplift because of the resilience of their businesses, they were still on the cusp of investment grade because of Ireland’s Ba1 with a negative outlook from Moody’s,” says Gregory. “It was potentially a challenge to ask investors to buy into a story where they might have faced a downgrade to below investment grade, although both issuers offered a coupon step-up to mitigate this.”
In the event, says Gregory, the perception among investors has been that as ultra-defensive utilities, credits such as ESB and Board Gáis are as strong as the Irish government itself.
“ESB and Board Gáis have both traded more in line with high grade European credits than with some of their southern European peers, with ESB recently trading 40bp through the government,” says Oliver Sedgwick, head of EMEA investment grade syndicate at Goldman Sachs in London. “That is not necessarily a surprise, because there are plenty of examples in Europe of credits that have dissociated themselves from the sovereign in the secondary market, such as the Spanish and Italian banks.”
Beyond the domestic euro investor base, demand for elusive Irish-based corporate borrowers is also robust in the dollar market. When the Dublin-listed food company, Kerry Group, launched its debut public bond in April, it generated an order book of $3.25bn for a $750m 10 year deal, allowing it to price at the tight end of guidance.
Supply dwarfed by demand
Beyond the issuance from the utilities, there has been precious little in the way of supply aside from credits such as Smurfit Kappa, which printed a €400m seven year high yield trade in January. Like CRH, however, Smurfit Kappa is regarded as a multinational based in Ireland, rather than as a corporate that is a genuine play on the Irish economy. As it says on page two of its latest annual report, Smurfit Kappa operates in 21 countries in Europe and 11 in the Americas, and owns 104,000 hectares of forest plantations in Latin America.
“There is definitely more appetite for Irish corporate credit than supply,” says Sedgwick. “Although there has been some volatility in the credit market recently the corporate market clearly remains a safe haven.”
Morven Jones, head of European corporate and SSA debt capital markets at Nomura in London, agrees, saying that the supply-demand disequilibrium has had a visible impact on pricing in the Irish corporate space. “There is no shortage of liquidity for Irish credits,” he says. “Investors would love to see more Irish borrowers coming to the market, and it is this scarcity combined with the successful return to the market of the sovereign which has helped to reduce the premium for issuers in general.”
The fixed income space is not the only market starved of exposure to Irish corporate names. “Barclays is one of the most significant lenders to large cap Irish companies, a segment which obviously has more modest funding requirements than large cap companies in bigger scale markets,” says Charlotte Weir, managing director of debt capital markets at Barclays in London. “The tenors of banks’ loans to Irish companies are shorter than they were, but the days of lending 15 or 20 year money to companies anywhere in Europe are long gone. From the perspective of lenders and bond investors, any perceived stigma that might have been associated with the Irish economy has significantly dissipated.”
The potential of the USPP market
|Bankers say that the imbalance between demand and supply from Irish borrowers is probably even more striking in the US private placement (USPP) space than it is in the public market. |
“The USPP market has historically been a very important source of funding for Irish corporates outside of the bank market,” says Angus Whelchel, head of European private capital markets at Barclays, who adds that the private placement market has been especially appealing to corporates that are often unrated and have modest funding requirements. Part of the attraction is the product flexibility, which allows transactions to be tailored to suit issuer needs. “It is not uncommon to see deals with multiple tranches based on different tenors and currencies,” he says.
“There is a natural affinity among US investors for Irish corporates,” adds Whelcel. “They are regarded as strong operators with a similar management style to US companies, and they have performed well over time. Even during the crisis, Irish corporate borrowers continued to have very good access to the USPP market.”
Perhaps the clearest example of how receptive the USPP market has been for Irish corporate borrowers came in 2003 when Electricity Supply Board launched a seven-tranche issue in dollars and sterling which raised the equivalent of $1.03bn, which at the time was the largest issue ever from a non-US borrower in the market.
Bankers say that the recent expansion of demand in the USPP market is such that investors would easily be able to accommodate a deal of this size from Irish corporates, particularly those with a demonstrable international presence in terms of their assets and revenues.
“The buying power of the US investor base has increased over the last two to three years, and importantly, for European issuers we are also starting to see demand from European investors,” says Whelchel.
The bad news, says Whelchel, is that there is insufficient supply to meet this burgeoning demand. “There is a sizeable supply-demand imbalance,” he says. The result is that total issuance, which reached a record $55bn in 2013, is down this year by about 20%, and that well received borrowers looking for $100m are regularly swamped by demand.
Bankers add that the overall reduction in supply is creating outstanding opportunities for issuers. “Pricing levels are very competitive with the public market,” says one. “And because investors are largely buy and hold institutions which aren’t concerned with marking to market, volatility is much lower.”