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The European Union's SURE debut stunned the market on Tuesday with books for the two-part 10 and 20-year social benchmark passing €233bn, the largest order book ever seen in any market. The transaction, the most hotly anticipated deal of 2020, sets the stage for what will be the biggest force in the region's capital markets in the coming years. And while it is not quite the jointly and severally liable Eurobonds that arch Europhiles have long dreamt of, it is as close to them as can be. Leads Barclays, BNP Paribas, Deutsche Bank, Nomura and UniCredit started marketing just before 8am UK time at 6bp area over swaps for the 10-year and 17bp area for the 20-year. After less than an hour books were over €150bn, split between orders of more than €95bn for the shorter tranche and over €55bn for the longer - a level of demand typically seen for a sovereign syndication, not a supranational deal. "When the process started in May, there was a bit of cynicism about what really could be achieved," a lead said. "We're now in October and they're doing their first trade. That's incredible progress and I think we'll be even more impressed by the end of the year. This is a fantastic name. The quality of the credit and what it means, I think investors are reacting along those lines." The European Commission, via the EU, is expected to raise at least €87.4bn of social bonds under its SURE programme by the end of 2021, and another €800bn between 2021 and the end of 2026 under its Next Generation EU programme. To put the scale of the increase into perspective, the EU has raised just €500m year-to-date and only printed €400m in 2019. No other issuers in Europe have ever seen an increase of this magnitude in funding needs. The emergence of the issuer is the most meaningful step yet for the region in acting as one as it looks to tackle the economic devastation caused by the Covid-19 pandemic. With so much riding on the trade, leads were keen to give investors clarity on pricing as soon as possible, swiftly setting the spreads at plus 3bp and 14bp. Those suggested respective new issue concessions of 1bp and 2bp, leads said. "When you have a book in hand like this and investors have done a great job, what they want to see is clarity on what they're getting in terms of price and you need to move quickly," the lead said. "I think everyone will appreciate that, issuer and investors. You see what the size of the programme is and what they need to do in record time, yet the premiums we needed to use were modest." Final terms were fixed after less than two hours in all, the 10-year sized at €10bn and the 20-year at €7bn. Pre-rec books at the time stood at over €145bn and €88bn. DELICATE BALANCE Bankers away from the deal said the EU would have to find the right balance in tightening the spread without leaving a bad taste for investors. "The book will be hugely oversubscribed and they will have the ability to move tighter. But they also won't want to leave investors disappointed given they will be scaled back on their allocations, so you don't want to squeeze pricing too much," a senior syndicate banker said. "If you have €100bn, and then another €800bn to do, you wonder if 1bp on the first €15bn matters that much. You want to show movement tighter that's sensible and demonstrate a successful deal. Whether you want to move 5bp-6bp on a huge book is debatable." Bankers agree that the first deal, having been so eagerly anticipated, was always likely to go well. "The first is arguably the easiest one: you know everyone is going to turn up, and they will end up with a large book," a banker away said. "It sort of sells itself. It's more the second, third trade which are likely to be more challenging when some of the froth has gone and investors think: oh Christ, here they come again!"

BON

4 min read

EMEA

Helene Durand

Bonds

KDB shifts away from floaters

Korea Development Bank shifted away from floating-rate debt with a US$1bn dual-tranche SEC-registered bond offering yesterday, taking into account investors' preference for fixed-rate paper ahead of the planned phasing out of Libor. A US$500m 0.5% three-year Covid-19 response social bond priced at 99.748 to yield 0.585% or Treasuries plus 40bp and a US$500m 0.8% 5.5-year note priced at 99.721 to yield 0.852% or Treasuries plus 52.5bp. The respective initial price guidance was Teasuries plus 70bp area and plus 80bp area. KDB printed three-year US dollar notes in February and April this year, but they were both floaters. "Investor demand for floaters was strong at the start of the year because of the high level of Libor, but that trend is now reversed, while Libor is set to be phased out at the end of next year which leads to even less demand," said a funding official at KDB. The Secured Overnight Financing Rate, which is based on transactions in the Treasury repurchase market, will replace Libor. Libor is based on estimates from global banks. "There are not many broadly marketed Libor deals these days with even Asian investors slowing transitioning out of them," said a lead. A fixed-rate note is also more easily used as a comparable than floaters, setting a reference point for other South Korean borrowers, according to the funding official. The policy bank opted for a 5.5-year bond instead of a five-year tenor as the cross-currency swap rate was cheaper. "The issuer essentially extended its curve by half a year for free," said another banker on the deal. KDB's new dual-trancher received combined final orders of US$3.6bn from 107 accounts, gaining strong support from real money managers. The three-year portion was trading around 5bp tighter than reoffer, while the 5.5-year bond traded around reoffer in secondary on their first trading day. TIGHT PRICING Leads estimated fair value at Treasuries plus 40bp–55bp across both tranches, referencing recently issued bonds from Export-Import Bank of Korea as well as KDB. Kexim's 2025s priced last month, for example, were seen at a G spread of around 52bp, but there were no direct comparables for the three-year fixed-rate note. KDB's new senior unsecured notes have expected ratings of Aa2/AA/AA–, in line with the issuer. This was the bank's last public offering in the international bond market for this year, said the funding official. The bank raised over US$7bn this year, compared to US$5bn–$6bn in previous years. The rise is attributed to the financial support provided for businesses affected by the coronavirus outbreak. Asia took 24% of the new bonds, EMEA 53% and the rest went to US investors. Central banks and sovereign wealth funds bought 41%, asset managers 28%, insurers 17%, banks 10% and others 4%. Proceeds of the three-year tranche will be used for financing and/or refinancing loans and lines of credit that provide support for small and medium-sized enterprises as well as small offices affected by the pandemic. Bank of America, Citigroup, Credit Agricole, KDB Asia and Mizuho Securities were joint bookrunners.

BON

3 min read

Emerging Markets, Asia

Jihye Hwang

Bonds

Dim Sum bond market may see municipal bonds from Shenzhen

The Dim Sum bond market may see a supply of municipal bonds for the first time following China's announcement that it plans to further open up Shenzhen. The Shenzhen Special Economic Zone will be allowed to issue offshore renminbi bonds in the international market within an approved local debt quota, according to a pilot plan to give the municipal government more flexibility to pursue reforms on market development and economic integration. The measures announced Sunday by the National Development and Reform Commission also include areas such as the launch of stock index-futures products, more autonomy on land use and the establishment of a big-data centre in the Greater Bay Area. China, acting through the Ministry of Finance, has regularly issued sovereign Dim Sum bonds. The People's Bank of China is also a frequent visitor to the market. Chinese policy banks, commercial banks, local government financial vehicles, state-owned enterprises and private companies have also issued Dim Sum bonds, but so far no Chinese local government has done so.

BON

Quick read

Emerging Markets, Asia

Carol Chan

Bonds

Dim Sum bond market may see municipal bonds from Shenzhen

BON

Quick read

Emerging Markets, Asia

Carol Chan

Bonds

T-Mobile adds US$4.75bn to high-grade bond pile

T-Mobile continued its relentless march to market on Monday when it priced a US$4.75bn four-part bond, adding further momentum to what has been a monumentally active year for the issuer in the US high-grade space. The new deal brings the telecom's total raised in the US IG bond primary in 2020 to US$31.75bn — more than its competitors AT&T and Verizon combined, according to IFR data. All of that supply came from a company rated BB/BB+ that made its debut in the US high-grade bond market in April with a US$19bn five-part secured deal to fund its US$23bn acquisition of Sprint. Monday's latest offering is the company's fourth of the year and because it is also secured is rated Baa3/BBB-/BBB-. On this occasion, T-Mobile is offering investors two new notes and tapping two existing securities - which together garnered a US$17.9bn order book. The company priced a new US$1bn 11-year at 148bp over Treasuries and a US$1bn 40-year at 205bp over, well inside initial price thoughts in the area of Treasuries plus 175bp and 230bp, It also reopened its 3% 2041s for an additional US$1.25bn and its 3.3% 2051s for US$1.5bn at spreads of 160bp and 190bp over, in from initial price thoughts set in the area of Treasuries plus 185bp and 210bp. Both of the taps were initially issued in September at a price of Treasures plus 160bp and 187.5bp, and were last seen trading in the secondary at G spreads of 170bp and 174bp, respectively, according to MarketAxess Data. Yet another secured deal from the telco surprised some analysts who have been wondering about the company's strategy and how it intends to use the proceeds. Analysts at CreditSights are curious why T-Mobile has yet to tap the high-yield market to refinance some of its junk-rated debt, noting that it has some US$6.3bn of unsecured debt that is callable this year and next. The research firm thinks this deal may be an opportunistic foray ahead of what could be softer third quarter results as it continues to integrate with Sprint. According to the SEC filing, proceeds are for general corporate purposes, including the acquisitions of additional spectrum and debt refinancing. Both deleveraging and buying additional spectrum are areas that rating agencies are closely watching. "If the proceeds are used for anything other than refinancing existing indebtedness, it will slow the pace of T-Mobile's deleveraging," Moody's wrote in a note. "However, potential spectrum investments will support the company's competitive positioning and operating performance in the long term." S&P says T-Mobile has upsized its revolving credit facility to US$5.5bn from US$4bn, and it has about US$5.4bn in cash for recent debt repayments. However, it still thinks the company will need to access the capital market to address sizable maturities against low free operating cash flow due to integration expenses. T-Mobile faces some US$4.3bn in maturities in 2021, US$5.6bn in 2022 and US$6.4bn in 2023, according to S&P.

BON

3 min read

Americas, EMEA

William Hoffman

BON SF

UPDATE 1-United Airlines offers spare parts as collateral for new debt

Adds investor, analyst comments United Airlines is offering investors a US$3bn bond offering backed by a portfolio of spare parts, engines and aircraft to refinance debt falling due in 2021. A few months after cancelling plans to issue corporate bonds secured against an ageing pool of aircraft, United is hoping to use much of the same collateral to issue an enhanced equipment trust certificate. The US$3bn EETC is expected to price on Tuesday, backed by a portfolio of assets appraised at US$5.8bn - consisting of US$3.8bn in aircraft, US$1.3bn of spare parts, and US$665m in spare engines. CreditSights analysts described the deal as a US$3bn loan disguised as an EETC, pointing out that the deal contains collateral value maintenance tests that are more typical of secured loans and not EETCs. This is an "inappropriate" use of the EETC format, noting that such deals are usually backed by a select group of new or young aircraft, the analysts said. "It's not good stuff to own in a bad market," said one high-yield portfolio manager. US airlines have had to use a range of their assets to secured debt offerings this year to raise much needed liquidity in a severely depressed travel environment. Landing slots, gates, routes and loyalty programs have all been put on the line to raise cash. Structuring agent on the deal is Goldman Sachs, which also was lead on the air miles program backed bond offerings for United and Delta this year. Citigroup is an active bookrunner alongside Goldman Sachs. The banks held investor call on Monday with pricing expected on Tuesday. The notes carry expected A3/A ratings. ABORTED TAKEOFF The deal follows an unsuccessful attempt by United to raise US$2.25bn from a secured bond offering in May that was backed by a pool of 360 aircraft that also had a weighted average age of 19 years. Investors and analysts said the planes were old relative to the three and five-year debt the company was trying to issue. CreditSights noted that much of the aircraft collateral in the new EETC offering was involved in that failed bond offering. To boost the appeal of the new EETC, the deal has been structured to amortize much faster than traditional EETC notes given the nature of the collateral, executives said on a call with investors. The UAL 2020-1 has been structured to amortize at an average rate around 11% per year, according to an investor presentation, compared with the 5% rate on the company's last regular EETC, UAL 2019-2. United has split the aircraft collateral into two groups: a Tier I group with planes younger than 20 years old, and a Tier II with planes older than 20 years. The notional debt associated with the Tier I planes amortizes in seven years while the debt associated with the Tier II planes amortizes in four years. Overall, the notes have a seven-year tenor and weighted average life of 4.1 years.

BON SF

3 min read

Americas

David Bell

Bonds

T-Mobile adds US$4.75bn to high-grade bond pile

BON

3 min read

Americas, EMEA

William Hoffman

Bonds

ESM makes surgical strike ahead of the EU

In what will be a banner week for public European institutions in the bond market, the European Stability Mechanism moved early on Monday, printing a €2bn December 2024 note that sees the borrower potentially wrap up its funding for the year. Unlike the European Commission, via the European Union, which has been called upon to help shore up the region through the Covid crisis, ESM's pandemic support line has yet to be used. With so little left to do, leads Bank of America, NatWest Markets and UniCredit swiftly marketed the no-grow deal. "This is basically the warm-up act for the EU," a banker on the deal said. "There was definitely a motivation to be done and dusted before they announced their trade." By the time the mandate was announced for the EU, allocations were out for the ESM deal, with demand hitting more than €12.8bn. "It's going to be a tough allocation," the lead said, "€12bn-plus I think is the largest ESM book this year, it's impressive." Some bankers had questioned the timing of ESM's RFP last week, given that the EU was widely expected to emerge with its debut social trade under the SURE programme. However, as the EU is expected to be in the market every two weeks once it has fired the starting gun on its programme, others said there was little point in waiting. ESM did take into account the imminent arrival of the EU on the scene by starting marketing with 3bp of new issue premium at 6bp area through mid-swaps guidance. "It's a reaction to an expectation that we're going to have a very large issuer this week, so how do you maintain focus on a trade when you've got that coming," the lead said. Added to that was the fact that ESM was targeting the short end of the curve, where yields and swap rates are deeply negative. At -0.582%, the transaction priced through the ECB deposit rate. But it looked attractive versus France. "Investors are getting around 11bp of pick-up versus France, which is a big positive for central banks and real money investors," the lead said. "There's the added incentive of the PEPP, which still has a lot of room to buy supra paper, so that's a motivation for the fast money investors to get involved as well." Pricing was tightened by 2bp to less 8bp, leaving 1bp of concession on the table. "That was the right approach, they're not nickel and diming for the last basis point," a banker away said. "They started at the right level, and less 8bp was the right outcome. To do that ahead of the EU was pretty impressive." Another banker away from the deal, who put fair value at around less 9bp-10bp, said: "There's lot of liquidity in the short end, so I'm not surprised it went well. "It is probably a little bit surprising that the book got so large in the end, but €12bn is a small number compared to all the liquidity that has been poured in by the ECB in the short end."

BON

3 min read

EMEA

Helene Durand

BON SF

UPDATE 1-United Airlines offers spare parts as collateral for new debt

BON SF

3 min read

Americas

David Bell

Bonds

At last the wait is over as EU unveils mandate

The most eagerly awaited mandate of 2020 finally emerged on Monday as the European Union announced it has hired banks for a dual-tranche 10 and 20-year, a deal that will set the foundations for a multi-billion fundraising spree over the coming years. Barclays, BNP Paribas, Deutsche Bank, Nomura and UniCredit won the coveted top spot for the debut social trade (Aaa/AA/AAA) under the EU's Support to mitigate Unemployment Risks in an Emergency – or SURE – programme. Under the programme, the issuer will raise at least €87.4bn of social bonds by the end of 2021, while it will target another €800bn between 2021 and the end of 2026 under its Next Generation EU programme. Expectations are that the EU will raise at least €15bn with this week's transaction, with another €15bn in two weeks' time and possibly more before the year is out. "The more they can do this year, the better," a senior syndicate banker said. "It will alleviate the pressure on next year's funding. I think they could easily do between €35bn and €40bn by the end of year." This pace of funding in such a short space of time has never been seen before by any supranational, which would typically raise this amount of funds over a year and in multiple markets. "The market is extremely well prepared for this deal and I would be surprised if they didn't have a sovereign-style reception for the trade," the banker said. "However, I expect they'll have larger real money and bank treasury components. This will get a very strong reception."

BON

Quick read

EMEA

Helene Durand

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Bellwether

Eyes on the prize

WELCOME BACK CHRISTIAN Meissner. The former Bank of America investment banking chief has made what looks like a low-key return as vice-chair of Credit Suisse’s investment bank in charge of an advisory group aimed at cross-selling into the wealth management division. The Austrian does not seem a man given to self-doubt. Indeed, after Bank of America lost US$292m in a margin lending debacle involving South African home retailer Steinhoff, a “former Bank of America banker” speaking to the FT just after Meissner became a former Bank of America banker advanced the counter-intuitive suggestion that the bank’s main problem was that its risk management efforts were too pushy. “He was very frustrated by the way in which risk and risk management have dictated control of some of the strategic developments of the firm,” the “former Bank of America banker” was quoted as saying in a piece that purported to give the inside story of Meissner’s exit. Some might think that a loss of US$292m was evidence that risk management wasn’t dictatorial enough, but that wasn't the view of the “former Bank of America banker”. In fact, the “former Bank of America banker” told the FT that, rather than “taking the losses on the chin”, BofA had turned the unfortunate episode into “an existential crisis”. Which is one way of describing an enquiry designed to find out what went wrong. Nonetheless, those who know Meissner will wonder whether his new job might not be a stepping-stone to something bigger at CS. He’s one to watch. SO FAREWELL THEN Benjamin Lorello, who is retiring as head of investment banking at Jefferies. Many Europe-based bankers of a certain age have been flown across to the US to meet Morello during Jefferies’ various hiring pushes over the last decade. One told Bellwether how, upon arriving in New York to meet Lorello, he was told he couldn’t leave until he signed a contract (the banker declined, but was allowed to go home.) Nicknamed the “Medicine Man” from his time as a high-earning, top-producing healthcare banker at UBS, Lorello is well worth a Google. Suffice to say he’s got a bit of an “old school” reputation, but his approach has been successful and he’s ruled the investment banking roost at Jefferies for 11 years. It is nonetheless safe to say that many of the firm’s London-based bankers won’t miss his weekly Sunday afternoon conference calls – a tradition they hope will be quietly dropped by his successor Chris Kanoff. MIKE HARRISON, THE former head of equity brokerage at Commerzbank, left the city three years ago and has now emerged as the author of geo-political thriller “The Pale Tiger”. The blurb looks great and the plot pitches the US against China with some suspicious hedge funds thrown in. Harrison spent 30 years in the City, and his website says: “I have seen the beast, that toxic nexus where power and money warp the best of intentions and fan the worst of them.” The question is whether this is intended as a powerful metaphor for high finance, or is just a factual description of the view from the top floor of Commerzbank tower, which looks up at larger rival Deutsche Bank. Harrison’s novel could provide a thrilling escape from lockdown, and is perhaps more exciting than his last foray into print in 1996, when he wrote “Principles in Operation Management”. Fans of that work may not get the follow-up they'd hoped for.

IFR 2355 - 17 Oct - 23 Oct

More Bellwether

IFR Events

IFR hosts a comprehensive programme of conferences, seminars and roundtables throughout the year, providing authoritative insight into the trends and outlooks for specific regions and asset classes.

View Events Calendar

IFR Digital Edition

Access a digital replica of IFR's print magazine, updated each Friday. Plus regular Special Reports and Roundtables, covering industry themes and trends.

Latest Digital Edition

Bellwether

Eyes on the prize

IFR 2355 - 17 Oct - 23 Oct

More Bellwether

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