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Friday, 24 November 2017

Europe Investment-Grade Corporate Bond: Sanofi's €3bn triple-tranche bond

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Sugared pill

Sanofi demonstrated what was possible when it sold the first negative-yielding non-financial corporate bond in euros in September, a landmark transaction brought about by the ECB’s market-changing stimulus measures.

“It was a ground-breaking transaction that offered super-cheap funding,” said Alex Menounos, head of EMEA IG debt syndicate at Morgan Stanley. “The question was whether a negative yield was really possible.”

Although more than a quarter of euro investment-grade corporate bonds are quoted at a negative yield, according to Tradeweb data, corporate investors were still getting their heads around the idea of a negative-yielding new issue market.

Borrowing costs hit record lows after the European Central Bank made its initial announcement regarding corporate purchases on March 10, which saw yields on dozens of eurozone companies’ existing bonds fall below zero.

“The Sanofi deal was a stand-out and pivotal deal for the market, and what drove it was the need for investors to park cash,” said Frazer Ross, co-head of European corporate bond syndicate at lead bank Deutsche Bank.   

Investors at the time of the Sanofi deal said that weighing up whether to invest in negative-yielding issues seemed quite perverse, but many did participate and said negative yields can still offer some value in relation to cash holding fees.

Investing in corporate bonds can be a better option than depositing cash, where investors may be charged a more negative rate on their balances.

“Thoughts were that investors would be keen, but it was still not that easy to prepare the ground, given that you’re crossing into largely uncharted territory,” said David Villedieu, head of French corporate fixed income capital markets at Morgan Stanley.

The French pharmaceutical firm printed deals at yields of –0.05%, on €1bn January 2020 and €500m September 2018 bonds.

Sanofi’s three-year came alongside €750m–€850m six-year and €1bn–€1.15bn January 2027 deals.

For the long three-year and six-year tranches alone, the average yield was only 0.01%, ie, €1.85bn of funding at an effectively zero cost.

Similarly, German railway operator Deutsche Bahn sold a €350m five-year deal in July at –0.006%, but some questioned whether it counted as being the first “corporate” issuer to sell negative-yielding debt due to the company being 100% state-owned.

Bookrunning banks on Sanofi’s A1/AA rated deal were BNP Paribas, Morgan Stanley, Credit Agricole, Deutsche Bank, MUFG and Natixis.

* Quote attribution corrected in first and seventh paragraphs.

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