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Italians and Iberian corporates are back, and not a moment too soon

25 Jan 2011

The last two weeks have marked a turning point for the peripheral eurozone’s corporate borrowers. Investors are more willing than at any stage since the Greek crisis to judge them on their standalone merits. Of course, a hot European corporate bond market helps.

Spain, Italy and Portgual’s corporate borrowers have had a good two weeks. Ever since their respective sovereigns managed to carry out bond auctions, their spreads have been tightening and investors’ sentiment towards them improving.

The first sign of this was the response to last Tuesday’s Eu1bn five year deal from Telecom Italia, the first from a peripheral eurozone corporate borrower this year. The deal raised nearly Eu7bn of orders and is trading 40bp tighter than its re-offer spread in the secondary market.

This week is was the turn of Iberian companies. Three have tapped the market this week, each one raising big oversubscriptions. On Monday, Telefónica raised a whopping Eu14bn of orders for a Eu1.2bn six year trade, and Iberdrola’s book for a Eu750m three year note totalled over Eu5bn. A day later, Energias de Portugal’s Eu750m five year bond — the first benchmark Portuguese corporate deal since March 2010 — proved similarly popular.

Demand has not been confined to investment grade borrowers. Ono, a Spanish cable firm, printed a Eu460m high yield bond on Friday. Despite being rated triple-C, the note was more than 10 times covered.

The explanation from syndicate bankers and investors is invariably the same. They say that the market is differentiating more and more between corporate borrowers and their sovereigns. The effect has been to ensure that company’s like Iberdrola and EDP can claim without hesitation that they have access to the bond market.

Of course, not all is rosy. Much of the demand is simply due to corporate supply from the rest of Europe being so low this year. Investors — most of whom have had a bullish view on corporate credits for some months — have little else to buy in the primary market.

Also, Iberdrola’s five year debt still trades about 100bp wider than that of its northern European peers such as E.On and RWE. The majority of that spread is caused by Iberdrola being Spanish instead of German. And borrowers from Italy and Iberia would still struggle to sell hybrid bonds — no matter what their standalone credit profiles.

But the situation is improving, and not a moment too soon. Investors realise that companies such as Telefónica — which has a solid financial profile and plenty of revenues outside Spain — are trading wider than they should.

A borrower’s nationality will always matter somewhat. But not to the extent which Italy and Spain’s corporate borrowers have been punished over the last nine months.

25 Jan 2011