Rating: Aaa/AAA
Amount: £250m
Maturity: December 7, 2011
Issue price: 98.985
Fixed re-offer price: 98.81
Coupon: 5.5%
Spread at re-offer: 68.5bp over the 9% August 2012 Gilt
Launched: Thursday December 14
Lead mgr: Dresdner Kleinwort Benson
Bookrunner's comment:
The goal with this issue is to create a new 10 year benchmark in the sterling market. A large number of accounts have been switching out of the 2009 Gilt and out of the EIB 2009s since December 7, as the duration becomes too short on those bonds.
There is not a liquid 10 year Gilt now and there is no prospect of the Treasury presenting the market with one until the second quarter of 2001 at the earliest. That left a gaping hole in the 10 year maturity and a crying need for a Gilt surrogate. This new EIB transaction is a natural home for investors wanting to switch out of the 2009 Gilt.
To our pleasure, we have had two very strong orders from the continent from clients switching out of the 2009 Gilt, and that has given very good momentum to the deal. We also have the usual group of longer end UK accounts buying the bond as well.
This will be the 10 year benchmark for the EIB, which they will be tapping throughout 2001 to bring the size up to the critical mass of £750m-£1bn.
We have worked on the issue for some time with key accounts and were able to launch it today (Thursday) because the market moved in our favour.
We have seen the EIB 2009s trade very close to the price of the new bond all week and their 2021s at 66bp/61bp. At 68.5bp, the 2011s slot nicely into the middle of those two benchmarks.
A little under 25% of the issue has been sold for cash and the balance on switches, which is what we anticipated. Most of the switches have been versus the 2009 Gilt and some versus the EIB 2009s.
Market appraisal:
"...it is a good idea for the EIB to create a new 10 year benchmark, but, like a lot of deals the EIB does, something went awry between the good idea and its execution.
This deal was mandated at the start of the month and it should have been executed then. It became apparent a couple of days ago that this was not saleable this year and it should have been postponed until next year.
With their 2009 benchmark, the EIB went through the proper pre-launch process. They had a bookbuilding period during which they assessed the correct pricing. This deal was launched like a regular tap or a retail bond, which does not serve any purpose for the borrower other than to further its reputation of doing small deals well and big deals badly.
About half the syndicated bonds traded down in the broker. The rest has probably been sold outside fees to investors. It appears that the lead was offering discounted bonds and subsidised switches, so the only way for co-leads to get rid of theirs was to do the same thing."
"...I am very disappointed by this issue. Why bring it at the worst time of the year when investors are uninterested in new deals?
I heard it being talked last week at £300m and it has ended up at £250m, so the response was clearly less positive than anticipated.
Bonds were being freely offered to big accounts in the UK outside the re-offer when the issue was being announced, so I do not understand how the lead expects group members to sell their bonds at the proper price.
A lot of bonds traded down in the broker market, so obviously the syndicate members struggled to place their paper. I placed mine outside re-offer to an end account in the UK.
The pricing was also expensive relative to the EIB 2009s, which were trading around 72bp over at the time."
* General Electric Capital Corp
Rating: Aaa/AAA
Amount: £400m (increased 12/12/00 from £300m)
Maturity: December 18, 2001
Issue/re-offer price: 100.00
Coupon: three month Libor flat
Launched: Friday December 8
Sole mgr: UBS Warburg
* Transco plc
Rating: A2/A
Amount: £200m
Maturity: December 7, 2006
Issue/re-offer price: 99.388
Coupon: 6.125%
Spread at re-offer: 95bp over the 7.5% December 2006 Gilt
Launched: Wednesday December 13
Lead mgr: HSBC CCF
Bookrunner's comment:
This is Transco's debut following the demerger in October, when Lattice Group became the new holding company and Transco the regulated business that transports and distributes all gas in the UK.
The company had some refinancing of bank and bond debt to do. We approached them with pricing that they found attractive and we suggested that the deal be launched before the end of the year.
The swap market is becoming very illiquid and we would have struggled to bring this transaction even a day later. It is also becoming increasingly difficult to get hold of investors.
The process was very quick. We started talking about the deal last Friday, held some one-on-one presentations and an investor conference call this (Wednesday) morning, and went ahead with launching the issue.
It was necessary in some cases to explain the name and the demerger, but investors are familiar with the company and they do like the credit. The speed with which the deal was turned around proves that Transco has a very loyal following among UK institutions.
The company has a good story to tell. It is a national monopoly and it has established a good track record over the years of launching deals that have shown performance for investors.
The pricing at 95bp over is in line with the secondary market, with National Grid 2006s trading at 100bp-95bp and Railtrack 2006s at 98bp-93bp. Distribution has been 90% into the UK.
Market appraisal:
"...we heard that HSBC had a big lead order to get the deal off the ground, but at the end of the day it was too tight.
Even if the pricing had been correct, it would have been tough to get investors interested at this time of year. Most have closed their books and are concentrating on the Christmas break.
At some 10bp more aggressive than comparables, it is a difficult deal to justify. There are several 2006 bonds one can point to that highlight Transco's tight spread - PowerGen, National Power and Anglian Water all trading at around 118bp over the Gilt, and Railtrack at 95bp.
I am sure there will have been some takers of the deal because Transco has a loyal following in the UK, and we did see good interest for the bond in retail size. However, it is unlikely to have found much institutional sponsorship.
The biggest indictment of this deal is that bonds were being freely offered in the street at 100bp over today (Thursday)."
"...a good 10bp too tight. People were selling their bonds back to the lead or to investors at full fees. We struggled to find anyone who bought it. Had it been priced correctly, I think it would have been a successful trade. It was certainly a point of the curve where there has been very little issuance recently so that was a good spot by HSBC."
"...very aggressive pricing and the lead did not support it very actively in the aftermarket. There were initially offers in the broker at re-offer, but it quickly went up to 100, or even 101, and there was no bid to match it. That gave the issue a poor taste.
Although Transco is a perfect name to bring to the sterling market and it retains a loyal following, spreads are under pressure, so this was not ideal timing."
Transactions increased:
* Réseau Ferré de France
Rating: AAA/AAA
Amount: £75m (fungible with four issues totalling £400m first launched 31/03/99)
Maturity: December 7, 2028
Issue/re-offer price: 100.109
Coupon: 5.25%
Spread at re-offer: 85bp over the 6% December 2028 Gilt
Launched: Thursday December 14
Sole mgr: Barclays Capital
Eurosterling secondary market
Compiled by Stephanie Weedon
HSBC Bank Plc, London
Tel: +44 20 7336 3525.
Given that there are only two weeks before Christmas, both the primary and secondary market were surprisingly busy, with over £900m of issuance. This included the new EIB 10 year benchmark at a spread of 68.5bp over Gilts, a £325m 7.125% 2020 subordinated issue for Axa, a £200m 6.125% 2006 deal for Transco at 95bp over Gilts, and finally a £75m tap of the 5.25% 2028 RFF bond at 85bp over.
The BT dollar global deals tightened 5bp on the week - taking the narrowing since launch to 15bp - the 30 year closing 282.5bp mid, yet sterling telecoms bonds again underperformed. Both British Telecom 5.75% 2028s and Deutsche Telekom 7.125% 2030s widened out 10bp to 285bp and 240bp respectively. The repricing of the sterling bonds reflects recognition of the value of the coupon step-up in the dollar bonds.
Swap spread movements were focused just at the long end: the 15 year moving out 8bp to 101bp; the 20 year 8bp to 107bp; and the 30 year 11bp to 109bp. KfW 5.5% 2015s moved out only 3bp to 74bp mid, and EIB 6% 2028s closed 5bp wider at 74bp mid.
