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Glaxo wins, Saint-Gobain loses in game of ‘chicken’

29 Mar 2007

The European high grade corporate bond market had one of its biggest weeks of issuance this year, with some Eu7bn of paper sold — but the deals’ varied outcomes showed how treacherous the market has become since stockmarkets dived at the end of February.

Banishing a long, serene period of eager demand for every asset, equity and bond markets have been volatile for a month. But this week’s corporate bond sales still pushed European corporate issuance for the first quarter to Eu33.4bn, ahead of last year’s Eu32.8bn.

"The markets are very much up and down, depending on what the Fed is saying," one asset manager in London said. "When the Fed is dovish, the market gets better; when it is hawkish, things get worse. Last week, the FOMC was a positive for the market but this week, on the back of Bernanke’s testimony, the market went wider."

More and more issuers are adapting to the choppy market conditions by taking a US-style approach of leaping into the market to launch and price bonds in a single day, hoping to be in and out before they are caught by a sudden change in the market. At the same time, investors are nervous of being caught in a widening deal, and will drop bonds quickly if they sense danger.

Issuing at top speed paid off handsomely for double-A rated GlaxoSmithKline, the UK pharmaceuticals group, when it returned to the market after a six year absence to launch a £1bn 35 year bond — the biggest long dated corporate issue in sterling.

HSBC and Lehman Brothers held no roadshow but opened the books at 9.15 on Wednesday morning and closed them at 2pm with the deal solidly oversubscribed.

Compagnie de Saint-Gobain, the French construction firm, must have thought it had pulled off a similar coup on Tuesday when it priced a Eu2.5bn bond in five and 10 year tranches with over Eu6bn of orders.

But the market lashed back at the Eu1.25bn 10 year tranche on the break, and it widened by 3bp-4bp or as much as 7bp, according to various market participants.

UK advertising agency WPP also took a beating after massive subscription of £2bn for its £400m 10 year bond. The deal widened by 2bp-3bp over the week after pricing on Tuesday, probably because WPP had pushed the spread too far, to 98bp over Gilts from talk of 100bp-105bp.

One fund manager in London criticised borrowers like Saint-Gobain, which is rated triple-B and lacks the rarity value of GSK, for launching deals without full marketing. "We have recently seen a tendency from repeat issuers not to roadshow properly," the fund manager said. "If borrowers want to sell bonds, they need to get their skates on and visit investors."

But that does not seem to have damaged Saint-Gobain’s deal, since it attracted a huge order book. And WPP also held a roadshow.

Instead, market participants criticised Saint-Gobain and leads ABN Amro, Citigroup, Dresdner Kleinwort and Société Générale for pushing the pricing on the 10 year tranche too tight for its size, and for not taking account of likely order inflation by some investors.

One syndicate banker in London suggested that a Eu500m 10 year tranche would have been possible at the 50bp over mid-swaps level — flat to CDS — where the deal was priced, but Eu1.25bn was too much.

Cash and CDS comparisons

"The leads pushed the deal way too hard on size," another syndicate manager said. "The complicating factor here is that against cash bonds, the guidance of 50bp-53bp looked OK. However, a lot of investors look at CDS and then the proposition is not so attractive. The leads thought they could take a gamble and this paid off initially. However, Eu6bn was the peak of the book and some investors who were looking at CDS started to look in a different direction. While the market was weaker after the pricing of the bonds, the other transactions priced on the same day did not widen."

Another market participant said some investors might have taken fright when they saw the final size of the deal, adding: "I can’t remember an investment grade deal that has widened this much recently. The market is a bit more difficult but still in good shape and new issues are generally going quite well. However, any small sign of weakness and investors quickly get out."

Saint-Gobain’s Eu1.25bn five year FRN, on the other hand, held well at around the 28bp over Euribor pricing level, from guidance of 30bp area.

The leads and some investors were keen to defend the transaction. One investor in London said: "We like the credit and thought the deal came at a decent level. I am not sure why the deal widened and we are comfortable with our position." Bankers at the lead managers were confident that the widening would be short-lived.

"The 10 year bonds did trade wider after pricing, on the back of weaker market tone and some momentum players exiting the deal," said an official at Dresdner. "US stocks dipped, there were more discussions around subprime and the bonds moved to 79.5bp-78.5bp from the 75.2bp pricing over Bund on the 10 year, in line with the market. Furthermore, unlike other transactions this week, the issuer offered a limited premium against CDS."

He said the order book on the 10 year justified the Eu1.25bn size and that investors had been buying more bonds in the secondary market.

Success stories

The volatile market conditions did not affect all deals, however — Casino Guichard-Perrachon and Imerys escaped unscathed.

French retailer Casino priced a Eu750m seven year via Barclays Capital, HSBC, JP Morgan, Natixis and Société Générale on the same day as Saint-Gobain. But the order book of over Eu4bn kept its promises and the bonds tightened.

After a non-deal roadshow at the end of last week, the leads took a US-style approach, with whispered guidance of low 80s. Strong feedback prompted them to go out with 79bp-82bp over mid-swaps.

To encourage investors, they said the deal would not grow and would price within the guidance. It came at 79bp, 6bp outside CDS. This was welcomed by investors and market participants who lauded Casino’s "first proper deal" for some time.

Imerys, the French minerals processing group, easily priced its Eu500m 10 year bond via Calyon, Natixis and Royal Bank of Scotland at 75bp over mid-swaps. The high 70s guidance was quickly refined to 75bp after 40 minutes, thanks to a Eu1.9bn order book.

Hélène Durand

29 Mar 2007