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Saturday, 21 October 2017

Offerings abound as appetite grows

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  • Offerings abound

Automotives are still at the centre of the German corporate bond market, but demand for German paper has seen issuance from lower rated companies and even unrated ones.

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With banks nervously keeping an eye on the latest regulatory diktat from Brussels and Basel, there is little surprise that European corporates have increasingly turned to the bond market for funding. No more so than in Germany. Last year the country’s investment-grade companies sold €70bn bonds, a jaw-dropping 96% increase on 2011 and 121% more than in 2010, according to RBS.

More to the point, pricing for German corporates has noticeably come in. “We are at low levels now. In January last year the average yield for a five-year was around 3%. Now it is below 2%,” said Marc Mueller, co-head of CMTS Corporates, Germany and Austria, at Deutsche Bank.

Much like last year, the flavour of the year has been cars. With their hands on their gearsticks and their feet on the accelerators they have hit the markets.

“Since 2006 German automotive companies have increased their capital market funding activity and the market has absorbed the supply well,” said Christoph Seibel, head of corporate debt capital markets Europe at RBC Capital Markets.

Little surprise really, Daimler and its financing arms have around €35bn outstanding, BMW has about €27bn outstanding and Volkswagen has almost €50bn outstanding, according to Tradeweb. Significant portions are due in the not too distant future. Daimler has €13bn of bonds maturing in US dollars, sterling and euros by the end of 2015, while VW has €8.5bn maturing by the end of next year. But rather than panic, what has been notable is how flexible this maturing pressure has made the company’s bond funding.

Take Daimler, for example. It wasn’t especially fast off the grid this year compared to its rivals, but what it lacked in speed it made up for in style. It hit the euro bond market at the end of February with a €1.5bn two trancher and was able to take full advantage of demand for stable credit in the aftermath of the Italian election. The €1bn three-year priced at mid-swaps plus 37bp while the €500m 10-year went at mid-swaps plus 72bp.

A couple of weeks later it was in sterling with a £150m tap of its 1.375% December 2015s. And at the beginning of April it came to market with a US$300m five-year Eurodollar at mid-swaps plus 85bp and €250m two-year FRNs with a coupon of 23bp over three-month Euribor.

But the company has also kept up its diversification into other currencies. It has sold paper in Australian and New Zealand dollars as well as a couple in Canadian dollars. In all it has funded in nine currencies this year.

Cars not the only movers

Although they have dominated, it would be a mistake to think that cars are the only story of the year. Beyond the automotive sector, German industrials have been active too.

In top form was Siemens, which in early March sold a €2.25bn two-tranche bond via Bank of America Merrill Lynch and Deutsche Bank, and joint leads HSBC, Morgan Stanley, RBS and UniCredit. On the back of €6bn orders, the €1.25bn eight-year sold at mid-swaps plus 35bp while the €1bn 15-year sold at mid-swaps plus 70bp – both tranches aggressively tight, but an indication of the demand for the name.

More recently, at the beginning of April, the world’s largest industrial gas company Linde sold a €650m 10-year at mid-swaps plus 45bp and an €800m five-year at mid-swaps plus 67bp.

Corporates have been tempted to dip their toes in the corporate bond market for the first time. In early December, German building services group Bilfinger, rated BBB+, sold its inaugural issue – a €500m seven-year issue via Commerzbank, Deutsche Bank and UniCredit, which priced at mid-swaps plus 115bp. Demand was such that the issue was oversubscribed to the tune of €5.2bn and pricing came in from the mid-swaps plus 135bp area.

But the story of success is not just at the highly rated end of the corporate spectrum, it is clear both at the high-yield and ungraded end of the market too. In mid-January, German healthcare company Fresenius, rated Ba1/BB+, sold a senior €500m deal with a coupon of just 2.875%.

“Let’s not forget, Fresenius is probably the best loved European high-yield name there is,” said RBC Capital Markets’ Seibel.

But while Fresenius has a special place in Germany’s corporate space and a two handle on paper rated that low is enough to hit headlines, they are not the only ones.

The market has also seen unrated German construction services company Hochtief come twice in the past year. Such is the demand for German paper that spreads were impressively tight on both occasions. In March last year, the Essen-based company’s inaugural deal was a €500m five-year at 5.5%. This year, the company printed a €750m seven-year with a coupon of 3.875%, issued at 99.25 to yield 4% on books of almost €4bn.

Part of the explanation for the overwhelming demand for (virtually) every German issue is the status that German corporates now have in portfolios.

“The appetite for quality paper is not going to abate,” said Karsten Rosenkilde, portfolio manager at Deutsche Asset & Wealth Management in Frankfurt. “German corporate paper is almost a proxy for the government. At the height of the crisis names such as the German car makers and other German multinationals were trading inside French government bonds.” They were seen as a safe haven; globally diversified names that were less dependent on the eurozone.

This is not to say, however, that any German company can simply come to market and expect paper to print. The warning sign in Germany was a particularly aggressive BASF trade in early February. The chemical company had planned a benchmark eight-year, but was prepared to offer only a 1bp premium. In the end only €500m was sold at mid-swaps plus 38bp, which even in this low-yield environment was seen as overly ungenerous.

And while appetite remains for most paper, investors can get indigestion as Daimler found with its US$300m five-year Eurodollar mentioned above. Although there were the familiar gripes that the mid-swaps plus 85bp pricing was too tight, it was simply that BMW as well as BAT, GECC and Nestle had already printed Eurodollar issues which was enough for the – comparatively niche – market. The week previously BMW had sold a US$500m four-year Eurodollar bond priced at mid-swaps plus 70bp.

With a general election in Germany later this year, it is natural to ask what impact this might have on the bond market or issuance. Most bankers regard it as a “non-event”, that is unless a grand coalition does not come together.

“It shouldn’t have any impact at all,” said one banker, “but the coalition’s junior partners – the CDU and the FDP – are likely to make some demands which might cause some short-term ructions.” The banker said citing the index rattling effect of comments by Jeroen Dijsselbloem, Dutch finance minister and head of the Eurogroup, over whether Cyprus deposit raiding might become a template for future bailouts.

But these minor concerns aside, little is expected to take the shine off the German corporate market for the rest of the year.

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