Telefónica's foray into the bond markets exceeded expectations yesterday (Thursday) when the Spanish incumbent raised $6bn from investors, with each of the dollar tranches increased by 25%. Bankers said the success of the transaction opened the window wider for other telecoms names, and had helped banish concerns that the large supply now entering the market might fail to find adequate support. But bankers warned there will be no guarantee of success for new issues coming to the market in the absence of generous pricing. The Telefónica issue is the first of $40bn equivalent of telecoms paper set to enter the primary markets before the year is out. But it should come as no surprise if the supply is pushed through smoothly. Telecoms issuers are unlikely to put deals at risk through foolish pricing, and investment bankers will not be worth their fees if the supply is not sensibly staggered. France Télécom, KPN and British Telecom are the remaining issuers lining up for jumbo deals. KPN is looking to sell a minimum of $3bn towards the end of September - possibly divided between five, 10 and 30 year issues in dollars, along with a euro tranche. And like France Télécom and British Telecom, which are planning to issue Eu5bn and $10bn respectively, bankers said KPN will have to pay a higher yield than Telefónica, because of the credit issues surrounding the borrower. One view was that France Télécom will need to price its deal 5bp behind Telefónica, British Telecom 5bp-10bp behind France Télécom, and KPN 5bp-10bp behind BT to attract the right level of investor interest. The high grade telecoms sector is not the only area to have entered a new issue boom. This week issuers in the subordinated bank debt market kicked back the traces, albeit in volumes that cannot compare with the telecoms glut. On Tuesday, SanPaolo IMI issued the largest ever lower tier two floater - selling Eu1bn via Banca IMI, JP Morgan and Morgan Stanley as part of a Eu1.1bn recapitalisation exercise. The Eu1bn floater was oversubscribed to the tune of Eu1.47bn. On the same day, Abbey National issued the largest subordinated bank financing in the sterling market - raising £1bn of upper tier two across four tranches along with a Eu400m upper tier two tranche via Lehman Brothers and UBS Warburg. The deal, announced on Thursday of last week, attracted demand from sterling investors of £750m-£800m over the first two days - reflecting the broadening of the UK investor base for subordinated bank debt and their larger take in the credit markets. In the dollar sector, Barclays Bank issued $1.25bn of Perp/2011 Reserve Capital Instruments (RCIs), marking a new departure for the directly issued tier one capital securities. The self-led deal was priced inside the spread talk at 282bp over the 10 year Treasury. UniCredito is among the banks set to contribute to the large supply of tier one paper over the coming weeks. The Italian bank is planning a deal of about Eu1bn via Merrill Lynch and UBS Warburg. And BNP Paribas, Credit Lyonnais and UBS are also due to issue tier one, with UBS set to raise around $1.25bn. The deal relates to the bank's acquisition of PaineWebber. Credit Suisse, meanwhile, is due to issue $4bn of senior and lower tier two paper following its acquisition of DLJ. At the high end of the credit spectrum, Freddie Mac stole the euro show with its inaugural EuReference Note, a Eu5bn 10 year deal. Priced at 55.5bp over the Bund, or around 6bp through mid-swaps, the paper was snapped up by investors across Europe who, even if yet to be convinced of the true liquidity of the agency's programme, could not resist the bargain pricing. Despite suggestions that the funding level achieved by Freddie Mac after swap was up to 10bp back from its US dollar funding levels, many bankers preferred to wait before delivering their final verdict on the programme. The fourth quarter EuReference Note, most likely a five year, will be keenly awaited as a guide to how much European investors are willing to pay for liquidity.
September 15, 2000