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Thursday, 23 November 2017

Euro Bond

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Powering the periphery: A deal has to be truly extraordinary to steal the show during the busiest week for European corporate bond supply in over three years. EDP’s September transaction was not only 10 times subscribed, but was also the first of its kind from a Portuguese corporate in over 20 months. The €750m five-year is IFR’s Euro Bond of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

Portugal’s largest utility started marketing a five-year transaction in the 6.25% area on Friday, September 14. European non-financial corporate debt issuance had already reached more than US$20.5bn-equivalent that week, so it would have come as no surprise if it met muted investor demand. But the opposite was the case.

After less than 45 minutes of bookbuilding, orders had already surpassed the €5bn mark, enabling the leads (Barclays, Banco Espirito Santo, BNP Paribas, Credit Suisse, ING, Millennium BCP, Mizuho and Societe Generale) to tighten guidance to the 6% area, plus or minus an eighth, for a deal tipped to be between €500m and €750m in size.

Even when the final spread was set at 5.875%, or mid-swaps plus 478.2bp, for a €750m transaction, the bookbuilding momentum barely slowed, reflecting just how impeccable the execution timing was.

When the books finally did shut on the Ba1/BB+/BBB– rated bond, orders had topped €7.5bn courtesy of about 475 accounts.

The deal priced in the early afternoon at a cash price of 99.472 and the spread tightened by 2bp immediately on the break, outperforming the market.

In the subsequent days, this contraction continued. By late November, the paper was trading at a cash price of 104.5, equating to a spread tightening of more than 80bp.

Bookrunners on the trade were ecstatic with the outcome, with one person involved describing it as a highlight of a very busy week and “the cherry on top of a multi-tiered cake”.

Syndicate officials away from the deal also praised it and said it had opened up the market for higher-yielding peripheral names – a forecast that proved accurate.

Just a week later Portuguese toll road operator Brisa Concessao Rodoviaria, rated Ba2 by Moody’s and BBB by Fitch, priced an April 2018 €300m deal, at the tighter end of price talk at 6.875%.

In early October, Portugal Telecom became the second corporate from the debt-stricken country to follow suit.

Excluding retail deals sold to domestic investors, EDP’s offering was the first transaction from a Portuguese corporate since January 2011.

Although the market had seen a swathe of peripheral corporates away from Portugal over the previous fortnight, this deal also marked the first from a Crossover credit.

Market participants agreed that the issuer’s and syndicate groups’ sense of timing was particularly crucial in ensuring the deal’s success.

Propelled by the launch of a new monetary stimulus programme from the US Federal Reserve, the iTraxx index was trading almost 10bp tighter on the morning of the deal, while the Crossover had contracted by almost 35bp.

Between the start of September and the launch date, both indices had tightened by more than 16%.

The issuance also came on the back of a relatively strong set of corporate results. EDP posted a smaller than expected 4% drop in first-half net profits, showing progress in weathering the eurozone crisis.

Based on the group’s outstanding paper and comparable bonds from other peripheral issuers of a similar rating, the new paper paid a premium of around 20bp over implied secondaries.

“Bearing in mind that the deal was 10 times subscribed, that concession was really very appropriate,” said one syndicate banker away from the deal.

He said this transaction had been the one bond this year that he most regretted not being involved in.

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