Corporate Bonds: New issue premiums shrink; Viridian surfaces in high-yield

The European corporate primary market was in risk-on mode on Wednesday as Dutch telecom business KPN shrugged off a downgrade with a €750m bond and German retailer Metro was on track to raise €500m despite a recent profit warning.

This week’s new issues have also performed well with German steel group ThyssenKrupp’s €1.25bn 2017 bond tightening by 12bp from the 280bp over mid-swaps print according to Tradeweb. The transaction priced 20bp inside initial guidance.

High-yield also stirred with UK-based oil company Afren mandating a new seven-year dollar-denominated senior secured deal to BNP Paribas, Deutsche Bank and Goldman Sachs. 

Afren, rated B by S&P and B by Fitch, will update investors in London on February 23 and 24 before moving to the US with meetings ending on Feb 29.

Proceeds will be used to repay and cancel a US$200m acquisition facility at BNP Paribas, of which US$100m is drawn and US$100m is earmarked for the final payment of last year’s USD588m acquisition of assets in Kurdistan, as well as for general corporate purposes.

Afren’s shares have risen more than 25% in the past month after the company found oil at one of its wells in offshore south east Nigeria – its main region for producing fields.

Northern Irish utility Viridian, expected to be rated BB by Fitch, is planning to raise £405m-equivalent via a five-year high-yield bond split between dollars and euros, in further signs that the high-yield bond market is thawing.

The deal has long been rumoured to come to the market, but volatile conditions have not gone in the issuer’s favour.

Lenders Deutsche Bank, RBS and UBS agreed to extend Northern Irish utility Viridian’s loan for another year in December, just days before it matured and only after they had exhausted marketing of a high-yield bond, which was once tipped to come before the summer volatility. The lenders extended the maturity of its debt until November 2012, at a more expensive margin of close to 500bp over Libor.  

Deutsche Bank (B&D) and RBS are global co-ordinators, while UBS, Commerzbank and Barclays Capital are joint bookrunners.

The bond will be callable after three years, and the proceeds will repay existing bank debt and be used for other general corporate purposes,

Catalogue of deals

In broader credit markets, the iTraxx Main index had widened by 1.25bp to 132.5bp by 12:15 GMT, while the Crossover stood at 575bp, 4.5bp wider but way off the 650bp level hit last week.

“The market was already in risk-on mode, and now that this short-term fear of a euro break-up has been removed, the market is well and truly open,” said one investment-grade syndicate official.

“Companies can access the market across all maturities. It’s almost like a catalogue; they just have to pick what they want,” he added, although he noted that Crossover names might struggle in terms of the size of fundraising in the 10-year sector.

The pipeline is not bulging, but more companies will look to take advantage of more stable conditions emerging, as well as attractive funding rates, the banker said.

The Electricity Supply Board (ESB), Ireland’s largest energy utility rated Baa3/BBB+/BBB+, starts a series of investor meetings on Wednesday, organised by Deutsche Bank, Royal Bank of Scotland and SG CIB, which are expected to run into next week.

The issuer will discuss its borrowing options for the next 12 months, and explore potential bond market funding opportunities in the near to mid-term.

Elsewhere, Australian telecoms company Telstra, rated A2/A, also kicks off a roadshow on Thursday, arranged by Deutsche Bank, JP Morgan and HSBC, for a potential transaction.

Divergence of core vs peripheries

In another sign of the strength of the market, deals remain well received.

ThyssenKrupp drew an order book in excess of €7.5bn for its first euro-denominated deal in three years on Tuesday, dominated by German investors, which represented 30% of the order book, while accounts from UK and Switzerland were also well represented, taking 20% and 15% respectively.

Demand for the KPN and Metro deals on Wednesday was less spectacular, at over €2.3bn and €3.5bn respectively, but they were still well oversubscribed and new issue premiums were sub 25bp.

Suki Mann, a credit strategist at Societe Generale, said average coupons for non-financial corporate borrowers has declined to 3% from 4.1% in January, although the decline has been less dramatic for the periphery’s corporate sector, where average coupons have only edged lower to 4.5% from 4.7%.

At the same time, the new issue premium has fallen to an average of 8bp for the core in February, from 33bp in January, but risen by 3bp to 29bp for the peripheral-based entities.

“This highlights how higher beta risk in core has been where the bulk of demand has been while the issuance YTD has been evenly split between the two categories of borrower,” said Mann.

KPN longer maturities in demand

Koninklijke KPN, rated Baa2/BBB, is looking to raise €750m via a 10-year bond maturing in March 2022, just a day after S&P downgraded its rating by one notch citing expectations of weaker earnings in 2012.

Lead managers Citigroup, ING, Societe Generale and UBS will price the bond later today at mid-swaps +195bp, the tight end of guidance of plus 195-200bp which followed initial price thoughts of plus 200-210bp.

The new issue will fit the issuer’s curve between its €500m 4.5% October 2021 bond and its €700m 5.625% September 2024 bond, bid at mid-swaps plus 171bp and plus 205bp respectively this morning, although both widened around 9bp after the mandate announcement. Pre-mandate levels indicate fair value for the new bond at around plus 176bp, therefore suggesting a new issue premium of around 19bp.

The October 2021 bond marks the issuer’s last venture in the euro-denominated market, an original 10yr deal launched in September last year.

S&P’s rating cut follows a profit warning by the company, the largest telecoms provider in the Netherlands, last month. The company also scrapped its generous annual €1bn share buyback programme for 2012 to pour money into its struggling domestic business.

S&P said KPN’s Ebitda generation will be impaired over 2012 due to the highly competitive environment in its local Dutch market, and warned that leverage would rise to around three times earnings once pension deficits and capitalised operating leases are factored in.

“KPN was already on review for downgrade, and investors are comfortable with the credit. There wasn’t any market reaction to the downgrade, so we decided to go ahead,” one of the syndicate bankers on the deal said.

Analysts at independent research firm CreditSights said it was more comfortable with KPN’s longer-dated bonds than its shorter-dated debt, based on expectations that the company should be able to address the challenges it faces in the medium to long-term.

“Nevertheless, we would be cautious about layering in too heavily given significant uncertainty facing KPN creditors in the near-to-intermediate term, preferring Deutsche Telekom as a defensive pick in the European telecoms space, or Vivendi, Telefonica or Telecom Italia for investors looking to reach for somewhat yield-ier options,” CreditSights said.

Spain’s Telefonica, which is rated slightly higher at Baa1/BBB+, raised €1.5bn with a shorter-dated six-year bond earlier this month at mid-swaps plus 300bp, which offered a 20bp new issue premium at the time.

Metro’s German appeal

Germany’s Metro, the world’s No. 4 retailer, rated Baa2/BBB, opened books on a no-grow €500m seven-year bond maturing March 1 2019 via Commerzbank, ING, Santander and UniCredit.

Like its predecessors in the primary market this week – Securitas and Thyssen – deteriorating earnings had only a limited impact on investor appetite for the retailer’s debt. Metro issued a profit warning in December, after a slow start to Christmas trading that it blamed on falling consumer confidence as a result of the eurozone crisis.

Moody’s changed its outlook on the fundamental business conditions for European retailers over the next 12-18 months to negative from stable on Tuesday, saying that the weak growth outlook would impact retail sales negatively.

Retail operations in Portugal, Spain, Italy and Greece, where GDP is expected to decline this year, will be most pressured, the rating agency said.

The leads on the Metro deal have finalised guidance at mid-swaps plus 145bp, the tight end of plus 145bp to 150bp guidance. Initial price thoughts were plus 155bp area.

Metro was last in the euro market in October 2010 when it raised €750m via a long six-year 4.25% bond maturing in February 2017, which also represents the issuer’s current longest-dated outstanding bond.

That February 2017 deal is bid at mid-swaps plus 124bp, after widening marginally following the mandate announcement, while a March 2015 bond is bid at plus 114.5bp, according to Tradeweb. Those reference points imply fair value for the new bond in the region of plus 134bp, thereby indicating a new issue premium of around 11bp. 

The retailer raised SFr225m at the start of February with a four-year transaction, its first visit to the Swiss market since the early 1990s. That deal priced at 160bp over mid-swaps.