Disintermediation pushes corporate stars to ratings

Two of the last great unrated corporate names, Heineken and Luxottica, made the jump to the rated world this year, as companies start to rely ever more on the bond market. Oliver West looks at the benefits of a rating, and asks how issuers can get by without.

  • 03 Jul 2012
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Dutch brewer Heineken did not even have to wait to issue a new bond to see that its decision to obtain a credit rating was likely to pay off. On March 7 this year, when Moody’s and Standard & Poor’s announced the company’s Baa1/BBB+ rating, Heineken’s outstanding April 2014 notes tightened by 35bp in the secondary markets to yield 1.6%.

Reverse enquiries flooded in, and when the firm issued its first rated bond a week later, the reception was predictably startling: a €12bn total book for an €850m seven year and a €500m 12 year.

Heineken’s deal came in the same week as another issuer’s debut rated trade — a €500m seven year transaction from Italian company Luxottica that also boasted an enormous book, of €7.3bn from 465 investors.

"A rated security gives the issuer the broadest range of investors available, allowing them to maximise size and minimise price," says Hugh Carter, head of credit syndicate at Commerzbank. "Without a rating, there is a smaller pool of investors."

Marco Bigatti, finance director at Luxottica, the Italian company that owns Ray-Ban and makes spectacles for Chanel and Dolce & Gabbana, admits the rating was crucial to the company’s successful deal.

"Investors appreciated the value in our bonds, and one of the main reasons was that we have decided to get a public rating," he says. "If we are issuing in the debt capital markets on a regular basis, we understand the need to get a wider audience and make clear disclosure to investors."

Like many family-controlled European companies, Heineken and Luxottica had never previously wanted a rating.

Until this year Luxottica had sold only one public bond, a €500m five year issue in November 2010 at 200bp over mid-swaps. Otherwise, it had funded very happily in the US private placement market, where ratings are not required and its strong business, including in the US, attracted investors.

Its latest bond, after Standard & Poor’s had granted its BBB+ rating, was priced at 185bp over mid-swaps, about 10bp tighter than Luxottica’s secondary curve, bankers estimated. Since launch — and even though the market has weakened since March 20 — it has traded tighter, to about 150bp-160bp.

Heineken’s last visit to the public funding markets was in 2009, when it issued a three tranche deal consisting of €1bn April 2014, £400m March 2015 and €400m October 2016 bonds.

Access all areas

For Heineken at least, the decision to obtain public ratings was taken in the context of a broader shift in the channels available to access long-term funding.

"While in the past you could rely on your banks to provide longer term loans, that is now quite a big ask, and even if they can provide them, they can be expensive," says Niels van Popta, group treasurer.

Being a family-owned company makes the equity markets less attractive too.

"For a company with a shareholding structure like Heineken, equity issuance is also not a logical first option to raise long term financing," he adds.

Therefore, as companies rely ever more on the debt capital markets, the moves by Luxottica and Heineken should be part of a trend.

"More companies are requesting ratings now because they need to rely more on the bond market — the questions concerning the availability of bank funding in large size require them to diversify funding sources," says Steffen Kram, head of ratings advisory at RBS. "A rating also makes issuing in a volatile market environment easier."

Indeed, the need to be able to tap different markets drove Heineken’s decision to get a rating. And the impact of having or not having a rating in debt capital markets is greater than before, says van Popta.

"Today investors have to comply with more and more requirements to get their investments approved, meaning their scope to invest in unrated paper is more limited," says van Popta. "The rating enabled us to get better pricing, but we also realised, after seeing SAB Miller go to the US Yankee market to issue bonds for the Foster’s acquisition, that we would need a rating should we ever need to access the same market.

"A rating would help us to unlock debt markets in which we had not been present before."

Yet several large European bond issuers remain unrated, with French software firm SAP arguably the highest profile of these in Europe after Heineken’s ratings move.

"The success of an unrated issue depends upon the issuer and its implied rating," says Commerzbank’s Carter. "SAP and Heineken, before it was rated, are both highly recognisable brand names and clearly investment grade, so they could get size even without a rating. For lesser known or cross-over issuers, size is more limited and price is probably not as attractive as it might be if they had a rating.

"In general, the successful execution of unrated bonds is indicative of extremely good market conditions, when markets are weak these deals are more complex to execute."

Beating the tide

Heineken and Luxottica both rode the wave of a buoyant first quarter for corporate bonds to issue their deals in March, but other examples show that investors are willing to commit to unrated deals even in rocky markets.

High end French retailer Galeries Lafayette sold €500m of seven year notes in April, while its compatriot Bureau Veritas, the certification and testing group, raised the same amount of five year unsecured money in May. Both unrated deals came on stormy days in the broader financial markets, and both attracted books of more than €1bn.

But not everyone agrees that ratings are more important than they were, either in terms of achieving size or allowing the bond to have secondary market liquidity.

"Since 2008 that is much less the case on both the primary and secondary side," says Yannick Naud, portfolio manager at Glendevon King, an asset manager able to invest in unrated paper.

"Before 2008, debt products were built for the rating and there were some large asset managers in continental Europe investing in assets looking purely at the rating of bonds, which is not the case anymore. New investment funds have fewer limitations than they used to in terms of buying unrated paper, and the majority will at least look at unrated deals."

Even some of those whose job is to advise companies on getting a rating admit that it is not always the best option for a company to obtain one.

"It is not a foregone conclusion that a rating is the right choice for any company," says Kram of RBS. "We must bear in mind that a rating is a means to an end, rather than an end in itself."

Timing, says Kram, is crucial.

"If a company does not have the track record required to get the rating it feels it is capable of, it may be better to wait."

Unrated, undeterred

However, for treasurers either not ready or unwilling to pay to have their companies evaluated in the public domain, there are certain criteria investors require to warm to the company.

"If the regulatory environment is efficient, you have confidence in the accounting rules, English is well spoken, you are in contact with the management and a culture of transparency prevails, the need for a formal third party rating diminishes," says Kram.

A perfect example of a jurisdiction that thrives without the dominance of rating agencies is Finland, where issuers are often unrated yet able to borrow frequently in the capital markets.

Finland boasts a very healthy and well developed domestic market with a long history of corporate bonds, and where asset managers, pension funds and insurance companies have good, long term relationships with many of the issuers.

But although these companies may be strong, they are not necessarily the largest.

"To begin with, ratings are costly and require interaction with a third party, so just on the surface are more cumbersome," says Peter Holden, head of corporate syndicate at Danske Bank, which was one of the bookrunners on Finnish company Nokian Tyres’ unrated €150m issuance on June 12.

"The other key point for many unrated companies is that most rating agencies have a minimum revenue threshold below which they will not grant an investment grade — no matter how good the company is. So for smaller and medium sized companies a rating is not necessarily that useful to their funding operations."

Importantly, Nordic corporates like those in Finland also tend to comply with one of the requirements Naud sets out when buying unrated paper: information on, and access to, the company.

"In Nordic regions, the culture of openness and transparency is so prominent," says Naud. "I can email a CFO of a Finnish or Norwegian company and get an answer within 24 hours. I cannot say the same for certain western European countries."

Bankers report greater interest from continental investors in Nordic countries as they shy away from southern European risk — even if they would rather buy rated paper.

"Undoubtedly, a rating is always preferable, but if there’s a lack of supply then most investors are comfortable with unrated paper," says Danske’s Holden. "We find some asset managers are making adjustments to their funds that to allow them to invest more in unrated securities."

Company specific

Some bankers believe these adjustments can be arduous to make, and in any case the thesis that a rating opens up a broader base of investor — permitting greater size, maturity and usually better pricing — is hard to argue against.

Indeed, as Heineken’s van Popta explains: "In today’s markets a company like Heineken can recover the cost of obtaining and maintaining a rating by benefiting from more tightly priced debt issues."

But that cost may not always make sense — it just has to be added to a long list of pros and cons of ratings that will lead to a different decision depending on the company’s circumstances.
  • 03 Jul 2012

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 12,908.95 107 8.11%
2 Citi 12,727.45 66 8.00%
3 JPMorgan 12,119.99 58 7.61%
4 Standard Chartered Bank 11,773.71 74 7.40%
5 Deutsche Bank 7,980.08 37 5.01%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Bank of America Merrill Lynch 2,377.71 7 13.40%
2 JPMorgan 1,880.36 7 10.59%
3 Citi 1,812.95 8 10.21%
4 Morgan Stanley 1,595.10 4 8.99%
5 BNP Paribas 1,525.76 5 8.60%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Standard Chartered Bank 7,008.38 26 11.32%
2 JPMorgan 6,985.16 23 11.29%
3 Citi 6,683.95 24 10.80%
4 Deutsche Bank 4,540.26 7 7.34%
5 Credit Agricole CIB 4,257.87 13 6.88%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 176.16 1 31.83%
2 AXIS Bank 85.65 1 15.48%
3 UniCredit 56.53 1 10.21%
Subtotal 318.33 3 57.52%
Total 553.46 4 100.00%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Standard Chartered Bank 942.34 7 18.05%
2 HSBC 884.30 8 16.93%
3 Citi 584.13 5 11.19%
4 Barclays 455.94 5 8.73%
5 State Bank of India 401.68 3 7.69%