The longest corporate drought on record

  • 28 Oct 2005
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Despite the best conditions many corporate DCM bankers can remember, only three Spanish companies have tapped the euro market in size this year. However, those transitions that have emerged have broken down barriers to new issuance and opened up new possibilities for the future.

 "There had been almost none since... What was it? March?" asks one corporate DCM banker in Madrid, looking out over Paseo de la Castellana, where temporary seating is being erected in preparation for Spain's national day on October 12. "Except, perhaps, for a little in June..."

He was, of course, talking about the drought in Spain — the country's worst since records began. But, equally, he could have been discussing the lack of corporate bond issuance from the country: only three Spanish companies have launched public deals since January.

Not until mid-March did the first emerge, a Eu540m deal for infrastructure and communications company Abertis. Investors then had to wait until June for further supply, when two companies tapped the market in the space of a week. Power company Iberdrola raised Eu500m and Unión Fenosa Eu750m, the latter through a domestic hybrid capital issue. The former increased its deal by Eu500m in September.

Just when the next issue will emerge is anyone's guess, but some bankers, at least, are optimistic. "We do expect probably one and maybe two corporates to come to the market before the end of the year," says one corporate bond specialist in Madrid.

Perhaps the weather has lifted spirits.

The evening of the Monday before Dia de la Hispanidad the heavens opened over the Spanish capital. The water ran in torrents down the passages that cut through from Gran Via to Sol. Unprepared for the downpour, Madrid's residents ran for the cover of the doorways of El Corte Inglé and, listening to a street quartet playing Vivaldi's Le Quattro Stagioni, wondered whether to laugh or cry.

Conditions in the corporate bond market today would normally result in a forecast of fresh supply on its way. "I don't think there can have been a better moment to do a 10 or 15 year bond than in the current situation," says one DCM official in Madrid. "If you are really looking for long term debt, now is the best moment to raise it, both because of the absolute levels and the very, very tight spreads."

However, corporate treasurers are, of course, taking account of conditions elsewhere when deciding where to seek debt financing. "The conditions in the syndicated loan market have been extremely attractive during 2005," says Antoine Maurel, head of Spanish DCM for HSBC in Madrid. "Many of the potential bond issuers — such as Endesa and Telefónica — have tapped the syndicated loan market this year as it has been the easiest option."

A corporate DCM banker at Banco Bilbao Vizcaya Argentaria in Madrid agrees. "If you look at the main Spanish corporates like Iberdrola, Endesa, Telefónica," she says, "they have signed syndicated loans in the seven year maturity — because that is what five plus one plus one is, at the end of the day — at very aggressive levels, so they have had the chance to raise a lot of cash in the loan market.

"The bond market offers attractive funding as well, but there is clearly an arbitrage in favour of the loan market."

Abertis leads the way

The first transaction that hit the market this year did at least show the potential capacity of the corporate bond market in a positive light.

Abertis Infraestructureas came to the market with a Eu540m 15 year transaction via ABN Amro, HSBC and La Caixa in mid-March.

The deal was executed the day before the General Motors profit warning that sent the credit markets into disarray in the subsequent months. But while other companies had to revise their ambitions or abandon their issuance plans altogether, Abertis's progress was smooth.

This was partly because the company had prepared its issue thoroughly. "This issue largely sidestepped the volatility in the market," said one banker at the time, "but what made a difference to this trade, as opposed to Vivendi or Portugal Telecom, was the fact that the deal was well flagged and the issuer undertook a roadshow last week."

The deal was priced towards the middle of guidance of 35bp-40bp over mid-swaps, at 37bp over. Abertis's outstanding 2014 issue — which was launched in February 2004 at 55bp over mid-swaps — had been trading in the low 30s. Despite the volatility, its new issue tightened 1bp-2bp in the aftermarket.

As well as negotiating a tricky market, Abertis showed its peers how they might overcome another obstacle to bond issuance.

"In 2004 Spanish corporate issuers had to set up new EMTN programmes because of changes to money laundering regulations," says HSBC's Maurel. "They used to issue through offshore vehicles in the Netherlands, for example, but they had to set up new SPVs in Spain.

"That is one of the reasons why many issuers took their time to set up their new EMTN programmes, and then they had to update their programmes because of the Prospectus Directive coming into force in July."

Abertis avoided such problems by issuing directly and off its domestic MTN programme. "The interesting thing about the Abertis trade was that it was not done with EMTN-style documentation," says Maurel. "It was issued through the CNMV with Spanish documentation.

"When we were roadshowing in Europe we explained this to investors and apparently it was not a problem that it was being issued with non-standard documentation."

Let M&A commence

Although the funding exercise was not explicitly linked to any particular activity, Abertis had in November launched a successful takeover of the UK's TBI, which runs Luton, Cardiff and Belfast International airports in a deal valuing the target at £500m.

DCM officials say that event-driven issuance resulting from M&A activity is likely to be the key driver of any issuance that does emerge. "Companies can get loans at such attractive rates that the only reason to come to the market is if they do a big acquisition," says one.

Those that are considered candidates for issuance before the year end are said to be eyeing the market for a combination of reasons. "There is some interest in prefunding, combined with the issuer's desire to maintain a presence in the market and the current attractive conditions," says one banker in Madrid.

Pablo Llado, head of origination at Calyon in Madrid expects to see more issuance next year. "Firstly, because the levels are very attractive," he says. "And secondly, because we will see more M&A. Of course we have to wait and see what happens with Gas Natural/Endesa, but there are other reasons to expect M&A.

"Spanish corporates have not been active acquirers since the Argentina crisis, but now they have developed a strong appetite. And if we see some mergers or acquisitions then they will finance these first through loans, but then in the capital markets."

The Gas Natural/Endesa saga nevertheless remains the deal to watch. "Right now on the corporate side we are all waiting to see what happens with the takeover of Endesa by Gas Natural, so we don't really know what is going to happen with all the related utilities and even banks and telecoms companies," says one corporate finance banker in Madrid. "The bad thing is that it is all going to take about five months before we see what happens."

The rating agencies have, however, already begun factoring in the potential M&A activity into their opinions on those involved.

Moody's placed the A2 rating of Gas Natural on review for downgrade in early September and changed the outlook of Endesa's A3 rating from stable to negative. Standard & Poor's (S&P) placed its A+ rating of Gas Natural on CreditWatch negative and did likewise with Endesa's A rating.

"The long term corporate credit rating of Gas Natural could be lowered, most likely by one notch, although a two notch downgrade cannot be excluded at this stage," said S&P. "The placement of Endesa on CreditWatch reflects the risk that the profile of the combined group would be commensurate with a A- long term rating."

Iberdrola's ratings were also affected, since as part of its acquisition strategy Gas Natural has agreed to sell it assets with an estimated value of Eu7bn-Eu9bn. Moody's placed Iberdrola's A2 rating on review for possible downgrade and S&P its A+ rating on CreditWatch negative.

"The placement of Iberdrola on CreditWatch reflects the likelihood that the long term rating, under which there is no financial headroom at the current rating level, is likely to be lowered by at least one notch as a result of the negative financial impact from a full or partial debt funding of the agreed asset acquisition, adding to Iberdrola's current debt of about Eu1bn," said S&P.

Hybrids preferred?

Bankers are hopeful that should Gas Natural's takeover be given the go-ahead by the relevant authorities then it could turn to the debt capital markets to raise hybrid capital.

As a result of the low spreads and yields in the credit markets as well as changes to the rating agencies' treatment of such securities, several companies have taken advantage of the product this year, with utilities among the most successful users of hybrids.

By using such instruments companies can achieve tax-deductibility on interest on the securities while they are at the same time treated partially as equity by the rating agencies. Structures used this year have achieved 50% or 75% equity treatment from Moody's.

Companies have in the main turned to hybrids because they want to defend their ratings, strengthen their balance sheet to expand, or cannot issue common equity, or a combination of the three.

Analysts at Credit Suisse First Boston in September looked at dozens of leading European companies to see which might want to raise hybrid capital for one of these or other reasons and Gas Natural was among its top picks, alongside fellow utilities EdF and Suez.

"Of the two non-state owned entities, both have expansionary aspirations," said the CSFB analysts, "but Gas Natural lacks sufficient financial flexibility to execute... Our top picks for likely hybrid issuance are Suez and EdF, while a combined Gas Natural/Endesa entity may benefit on a credit preservation basis from issuing a hybrid, especially if assets disposals are not executed in a timely manner."

Such a transition is not hard to imagine given the enthusiasm Spanish corporates have in the past shown for issuing preference shares. "Spanish companies were the first to issue hybrid products," says a banker at BBVA. "Repsol issued preference shares as far back as 1999, and Telefónica and Endesa have also done so, and Unión Fenosa did earlier this year."

Everything did not, however, go according to plan for Unión Fenosa. The company awarded ABN Amro, HSBC and SG CIB the mandate for a perpetual non-call 10 issue that was expected in early May. However, the deal was being marketed just as the credit markets were volatile and the issue was put on hold.

When the transaction did finally emerge, in mid-June, it was targeted at a different audience to the one initially planned. Banco Santander Central Hispano, BBVA, CaixaNova, Caja Madrid and Caja de Ahorros del Mediterraneo sold the Eu750m non-cumulative preference shares, rated BB+, to private banking in Spain at a floating rate of 65bp over Euribor.

But despite the difficulties faced by Unión Fenosa, bankers believe there is further impetus that will drive Spain's corporates to raise hybrid capital.

"What was interesting was the rational behind the Fenosa trade," says one corporate origination banker in Madrid. "Under International Accounting Standards the old preference shares are retreated as debt, so what Fenosa did was design a structure of preference shares that would be compliant with Spanish law and would achieve pure equity treatment from the auditors, as well as a degree of equity credit from the rating agencies." 

  • 28 Oct 2005

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 101,974.94 404 8.29%
2 Citi 95,105.34 354 7.73%
3 Bank of America Merrill Lynch 82,200.55 309 6.68%
4 Barclays 81,531.75 289 6.63%
5 HSBC 65,681.57 320 5.34%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Bank of America Merrill Lynch 8,556.66 16 10.43%
2 Deutsche Bank 5,064.63 12 6.17%
3 Commerzbank Group 4,780.90 20 5.83%
4 BNP Paribas 4,451.03 21 5.43%
5 Citi 3,873.29 11 4.72%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 2,316.87 11 11.60%
2 Morgan Stanley 1,958.99 12 9.81%
3 Bank of America Merrill Lynch 1,598.24 7 8.00%
4 JPMorgan 1,371.27 7 6.86%
5 UBS 1,219.50 7 6.10%