Aroundtown stunned the market on Tuesday when the German real estate owner signalled it is considering deferring coupon payments on one of its hybrid bonds, though the knock-on effect on the broader asset class was limited, as demonstrated by energy companies Orsted and EDF getting big orders for subordinated deals last week. Highlighting the economic challenges it faces in a higher-rate, lower-growth environment, Aroundtown said it may postpone coupon payments on its 3.75% perpetual note, which has €369m outstanding, as it confirmed that it will not redeem the bonds at their first call date on January 20. A similar statement was made on behalf of subsidiary Grand City Properties on its €200m 2.75% hybrid, which has a call on January 22. A final decision on both companies' coupon payments will be made closer to the time. While the news should in theory provide comfort to Aroundtown's senior bondholders, the owners of the hybrid made their views clear as the bond fell 18 points on the day to be bid at a cash price of 57, according to Refinitiv data, largely because of the possible coupon deferral. Other property companies' hybrids also suffered, falling four to eight points on Tuesday, according to ING. But the impact was largely confined to the real estate sector, with Danish utility Orsted and then French state-owned power company EDF printing heavily subscribed hybrids. Orsted's €500m 3022 non-call six green issue on Tuesday saw more than €5.25bn of orders, while EDF's €1bn perpetual non-call six deal on Wednesday got a final book of €5.6bn. Both Orsted's deal at 5.25% and EDF's at 7.50% printed through fair value, such was the response (See Bonds section for more). "The interesting lesson of the week is that one issuer is shooting down its hybrid and it hasn't killed the product – another issuer's deal was nearly six times covered," said a banker, referring to EDF's deal. While Aroundtown's decision not to call its hybrid was expected by investors, given the prohibitive cost of refinancing, its statement on coupon payments was a surprise. "Overall, this is negative for hybrid holders. The non-call was expected but the coupon comments were not ... This appears to be an unwarranted treatment of bondholders and they don't appear as top priority for management," said Johnathan Owen, a portfolio manager at TwentyFour Asset Management. Aroundtown has about €2.3bn of cash and liquid assets, yet the company emphasised that the decision not to call was part of its efforts to preserve liquidity. "Due to the uncertain macroeconomic environment, the company is putting a high priority on cash retention," said Timothy Wright, head of investor relations at Aroundtown. "If perpetual notes are repaid, the headroom until the company needs to raise new funding will be shortened, which will increase the risk for all stakeholders." He said the company aims to maintain its strong creditworthiness. "We can defer, reduce and even stop paying dividends if market conditions worsen, and deferring coupon payment is another tool to retain cash," said Wright. Owen said, though, that Aroundtown will eventually have to pay the coupons. "[The company] made it clear they think of hybrids as equity. However, it is worth noting that any deferred coupons will be cumulative, and so they will need to pay them sooner or later." Key feature Aroundtown has a senior rating of BBB+ from S&P and the agency said that the company did what was required and the decision not to call "does not affect the group’s creditworthiness". It added that "the optional nature of the call is a key feature of the subordinated notes and, in our view, supports Aroundtown's and Grand City Properties' flexibility to manage the group's capital structure". A second banker said Aroundtown's actions are a wake-up call for investors. "People have got a reminder what subordination means," he said. Growing up For some investors, the announcement i
Banks sitting on around €1.6bn-equivalent financing backing CVC's purchase of Unilever's tea business Ekaterra have finally managed to shift the debt – albeit a large discount. Banks including Goldman Sachs and Barclays sold the debt to fewer than 20 investors at a price in the low-to-mid 80s, sources said, one of the lowest prices seen in Europe's leveraged finance market this year, and in the same ballpark as the 81 cents at which JP Morgan sold a €272.5m high-yield bond from Dutch lingerie firm Hunkemoller. Buyers included macro credit funds that took tickets of up to €400m with the intention of selling further down the line when the market recovers, according to two sources. The Ekaterra deal was one of the largest and most long-standing financings underwritten in Europe before Russia's invasion of Ukraine and still sitting on banks' balance sheets. Such deals have been a thorn in banks' sides this year, as they found themselves unable to offload them as liquidity dried up. However, a broader rally in credit and a flurry of recent CLO primary activity has led to increased investor appetite for leveraged loans over the past few weeks, leading to some activity in primary and prompting bankers to look to shift acquisition financings into the market. "The market feels firmer so banks are able to find liquidity, and we're also running into year-end so why not take some chips off the table and clear the balance sheet going into next year?" said a leveraged finance banker. "But banks don't feel like they have to move [hung financings] before year-end at all costs." In Ekaterra's case, the lead banks decided to move the debt before year-end in order to avoid having to update company financials, which would take time, the sources said. "Banks weren't tapping people on the shoulders saying that they have to move it but leads have been sitting on it for a while," said the leveraged finance banker. Time to move Banks are finishing up the year with a fairly light balance sheet in Europe, having sold down hung positions to around €7bn. They are under much less pressure than earlier in the year when underwriters were left stuck with around €40bn-equivalent of M&A risk in the immediate aftermath of Russia's invasion of Ukraine. In addition, banks have been cautious about taking on new risk, while M&A processes are still few and far between. Still, there are some outstanding deals that banks now feel that they can shift. Lenders including JP Morgan and Morgan Stanley are looking to tap public investors in the coming weeks to shift the remaining financing backing online betting group 888's acquisition of William Hill's non-US business, bankers said. Underwriters had sold down a large portion of the £1.776bn buyout debt package at a substantial loss to investors in July, but are still sitting on a delayed draw term loan A. Market sources are also expecting JP Morgan to look for a window to sell a €425m high-yield bond backing Bain Capital's majority stake purchase of House of HR. The bank pulled the bond from the market in October, citing market turbulence. And banks are also hoping to sell down a €400m term loan A backing the merger of Konecta and Comdata to form a new company, KronosNet. The leads including BNP Paribas, Deutsche Bank and JP Morgan sold part of the financing, a €400m first-lien term loan B, in September. Those banks are now in the market with a minimum €50m term loan B add-on to partly repay the TLA. Deals still in the pipeline include €1.8bn in financing backing CD&R's acquisition of UK supermarket Morrisons. While some of the banks in the syndicate sold their positions down in full during the summer, other lenders including BNP Paribas opted to hold onto the debt either to avoid realising a loss or because they believed the market would improve in the future. Those banks are now likely to sit on the debt at least until the company's Christmas trad
China has lifted a more than half-decade-long ban on domestic equity fundraising by listed real estate companies, as part of wider policies to support the struggling property sector. The China Securities Regulatory Commission said on Monday that listed real estate companies can resume M&A and related equity follow-on offerings. Proceeds can be used to buy property-related assets, replenish working capital and repay debts, but not to buy land from local governments or develop new projects. The ban had been in place since late 2016, after the Central Economic Working Conference, convened by the Central Committee of the Communist Party of China and the State Council, first put forward the guiding principle that "houses are for living in, not for speculation", at a time when developers accumulated cash to buy up land in a red-hot property market. Real estate companies had been very active in applying for follow-on equity offerings that year. Applicants included Shanghai-listed Seazen Holdings, which passed a CSRC hearing for a Rmb5bn (US$696m at current rates) private share placement in July 2016, but the activity came to a halt after the conference. Seazen's offering stalled and the CSRC gave "window guidance" to encourage companies from the property sector to withdraw their applications. Markets welcomed the lifting of the ban. The Shanghai Stock Exchange Real Estate Index rose 7.07% on Tuesday and more than 40 A-share real estate stocks gained by 10%, the daily cap, including China Vanke and Shenzhen Overseas Chinese Town. Shanghai and Shenzhen-listed developers are the key beneficiaries of the new policy as Hong Kong-listed developers, except mainland China-incorporated companies listed in the form of H-shares, do not need Chinese regulatory approvals to sell equities offshore. Many Chinese developers on the Hong Kong exchange are red chips, meaning that they are incorporated outside the mainland. At least six A-share listed companies jumped on the bandwagon last week by announcing share placement plans, including Shanghai-listed Shanghai Shimao, a subsidiary of cash-strapped Hong Kong-listed developer Shimao Group Holdings, and debt-ridden China Fortune Land Development. Shanghai Shimao plans to offer shares equivalent to up to 30% of its current share capital to up to 35 investors. Based on its close of Rmb2.82 on Thursday, the deal could raise some Rmb3.17bn. (See Equities section for more). “Real estate companies are indeed very active on planning follow-ons and we received many enquiries from property clients this week. After all, these companies have been strictly restricted from refinancing for so many years,” said a Beijing-based banker. Going home With the domestic equity channel now open, some Chinese developers may opt to raise funds domestically instead of in Hong Kong as the city is more vulnerable to global macroeconomic factors such as rising interest rates. “If a developer has an A-share unit, it’s probably easier for them to raise funds domestically than overseas as many international institutional investors tend to stay away from the sector for now after a series of debt defaults,” said a Hong Kong-based ECM banker. However, another Hong Kong-based banker believes follow-on offerings from developers will continue in the city. “Not many Hong Kong-listed developers have A-share units. Many of them are red chips and they don’t need Chinese regulatory approvals to sell equities. Instead of waiting for months to complete a domestic offering, they are better positioned to seize the market window,” said the banker. Hong Kong-listed developer C&D International Investment Group moved fast on Tuesday to raise HK$809m (US$104m) from a top-up placement, riding on the positive sentiment surrounding the sector. Compared with the complete ban on domestic equity raising, Chinese regulators have also been less strict on H-share developers’ share placements. They ha
China has lifted a more than half-decade-long ban on domestic equity fundraising by listed real estate companies, as part of wider policies to support the struggling property sector. The China Securities Regulatory Commission said on Monday that listed real estate companies can resume M&A and related equity follow-on offerings. Proceeds can be used to buy property-related assets, replenish working capital and repay debts, but not to buy land from local governments or develop new projects. The ban had been in place since late 2016, after the Central Economic Working Conference, convened by the Central Committee of the Communist Party of China and the State Council, first put forward the guiding principle that "houses are for living in, not for speculation", at a time when developers accumulated cash to buy up land in a red-hot property market. Real estate companies had been very active in applying for follow-on equity offerings that year. Applicants included Shanghai-listed Seazen Holdings, which passed a CSRC hearing for a Rmb5bn (US$696m at current rates) private share placement in July 2016, but the activity came to a halt after the conference. Seazen's offering stalled and the CSRC gave "window guidance" to encourage companies from the property sector to withdraw their applications. Markets welcomed the lifting of the ban. The Shanghai Stock Exchange Real Estate Index rose 7.07% on Tuesday and more than 40 A-share real estate stocks gained by 10%, the daily cap, including China Vanke and Shenzhen Overseas Chinese Town. Shanghai and Shenzhen-listed developers are the key beneficiaries of the new policy as Hong Kong-listed developers, except mainland China-incorporated companies listed in the form of H-shares, do not need Chinese regulatory approvals to sell equities offshore. Many Chinese developers on the Hong Kong exchange are red chips, meaning that they are incorporated outside the mainland. At least six A-share listed companies jumped on the bandwagon last week by announcing share placement plans, including Shanghai-listed Shanghai Shimao, a subsidiary of cash-strapped Hong Kong-listed developer Shimao Group Holdings, and debt-ridden China Fortune Land Development. Shanghai Shimao plans to offer shares equivalent to up to 30% of its current share capital to up to 35 investors. Based on its close of Rmb2.82 on Thursday, the deal could raise some Rmb3.17bn. (See Equities section for more). “Real estate companies are indeed very active on planning follow-ons and we received many enquiries from property clients this week. After all, these companies have been strictly restricted from refinancing for so many years,” said a Beijing-based banker. Going home With the domestic equity channel now open, some Chinese developers may opt to raise funds domestically instead of in Hong Kong as the city is more vulnerable to global macroeconomic factors such as rising interest rates. “If a developer has an A-share unit, it’s probably easier for them to raise funds domestically than overseas as many international institutional investors tend to stay away from the sector for now after a series of debt defaults,” said a Hong Kong-based ECM banker. However, another Hong Kong-based banker believes follow-on offerings from developers will continue in the city. “Not many Hong Kong-listed developers have A-share units. Many of them are red chips and they don’t need Chinese regulatory approvals to sell equities. Instead of waiting for months to complete a domestic offering, they are better positioned to seize the market window,” said the banker. Hong Kong-listed developer C&D International Investment Group moved fast on Tuesday to raise HK$809m (US$104m) from a top-up placement, riding on the positive sentiment surrounding the sector. Compared with the complete ban on domestic equity raising, Chinese regulators have also been less strict on H-share developers’ share placements. They ha
There is potential for a revived CS First Boston to shine again as a standalone New York-headquartered capital markets and advisory firm and investors are showing interest in taking a stake. But much will hinge on how many top dealmakers the bank can keep, how its ECM, DCM and research platforms look after the carve-out, and how it will work with Credit Suisse. Industry sources said "CSFB: the sequel" has a chance of success as it will be rooted in the deep and lucrative US capital markets and Michael Klein could galvanise the firm. Klein is a former star Citigroup M&A banker who joined Credit Suisse’s board in 2018 and has now been charged with running CSFB. CSFB will be a spin-off of Credit Suisse’s advisory and capital markets activities. The new firm will be based in New York and outside investors will be invited, allowing the Swiss bank to sell down its stake over time. Klein is expected to merge his own M Klein and Co advisory firm into CSFB in return for an equity stake. Former Barclays CEO Bob Diamond’s Atlas Merchant Capital is interested in investing, but it is too early to say whether it will go ahead, two sources said. Credit Suisse has said a “highly respected investor” has made a US$500m “hard commitment” to invest, but the investor has not been named. There are key elements for optimism, in addition to CSFB's strong position in US markets. It is a top-tier franchise in M&A, ECM and serving financial sponsors; it will be focused on less capital-intensive areas; Klein is aiming for a "partnership culture" to build on the entrepreneurial spirit long championed at the firm; and it has a strong brand and history that should play well on Wall Street. But details on the structure of the new firm are sketchy. It first needs to set up a legal entity, and the spin-off may not happen until 2024, reflecting how much of the planning still needs to be done. “It’s ambitious. But judge us in two years, not now,” one insider said. Stabilising revenues in 2023 will be a challenge before the carve-out. Credit Suisse’s revenues from M&A advisory, debt and equity underwriting and syndicated loans in the first 11 months of this year were down 52% from a year earlier, far steeper than the 34% drop across the industry and the biggest drop among the top 15 banks, according to Refinitiv data. But it is still in seventh place for global fees, behind only the five US bulge-bracket firms and Barclays, showing the franchise is strong despite a run of scandals and blows. In the last two years Credit Suisse has still pulled in more in investment banking fees than UBS and HSBC combined. Klein knows that stopping the rot early next year is crucial to keeping staff and attracting investors, and bankers at the firm know that too. The reaction among current investors has been grim, however. Credit Suisse shares have slumped 39% since the restructuring plan was unveiled on October 27, and on Thursday hit SFr2.65, their lowest level for at least 33 years. That values the bank at barely US$11bn. Much of that decline is due to the drag of the bank’s SFr2.2bn rights issue. Credit Suisse also warned last month its investment bank will make another loss this quarter and the overall bank could lose SFr1.5bn. There has also been a dramatic outflow of funds from its wealth management arm. The share price fall also reflects wariness about the complex spin-off of CSFB. The carve-out will include equity and debt capital markets teams, but research and trading platforms will sit with within Credit Suisse in its markets division, leaving many to wonder whether such a model is workable. ECM and DCM also need distribution capabilities, which again look like they will sit in sales and trading in Credit Suisse. “If anyone can pull the First Boston idea off, Klein can. He was a great motivator at Citi,” said a senior banker who previously worked with Klein. “But it&rs
The equity-linked rally in the EMEA region continued on Wednesday with the return of Spanish utility and market regular Iberdrola, which raised €450m from an upsized green convertible bond that also marked a revival of the non-dilutive structure that had not been seen in Europe since 2018. Non-dilutive, or equity-neutral, convertible bonds formed a substantial part of equity-linked issuance in Europe from 2015 to 2018. Their prominence was due to the low rates environment and came despite any evident enthusiasm from the buyside or sellside. Investors disliked the extremely aggressive pricing required to make such CBs cheaper than straight debt, while bankers were not keen on the small fees for what was in effect a debt surrogate. The most recent non-dilutive was in September 2018 when Glencore tapped its US$500m zero-coupon 2025 paper for another US$125m. A few weeks before that, Adidas printed €500m five-year non-dilutive converts that had a negative yield of 0.73%. As the name suggests there is no chance of dilution as the issuer purchases a call option on its shares matching that embedded in the CB at the same time as issuing the CB. “At the moment, because of scarcity value, there is a lot of demand for strong investment-grade companies with a positive outlook like Iberdrola, which has a large renewable business during an energy crisis,” said Javier Pollan, head of EMEA equity-linked at Citigroup. “With the recent expiry of the last Iberdrola instrument, outright investors had to look at this week’s deal in order to keep exposure to the name and that created sufficient appetite to price this deal aggressively and make it work.” Iberdrola issued €500m of NDCBs in 2015 and then tapped the bonds for a further €200m in 2020. They matured in early November. Thierry Petit, head of EMEA equity-linked at BNP Paribas, said: “It is not a coincidence that Iberdrola priced an equity-neutral CB two weeks after its previous equity-neutral CB matured ... We’re playing on scarcity and if you want to be exposed to Iberdrola, the only way is to participate in the new issue." Even so, global coordinators Barclays and Goldman Sachs had been waiting three weeks to launch the offer into the right market. The wait was worth it as the five-year issue was upsized from €400m at launch. The bonds will pay a coupon of 0.8% and came with a fixed premium of 20%. A banker on the transaction said "in a world of higher rates and higher cost of debt, issuers are trying to tap any pocket of demand to reduce the cost of debt". Pollan said equity-neutrals might be the way to bring some investment-grade names to the structured equity market. But he said such deals only work in some circumstances. "The whole purpose of non-dilutives is to create an arbitrage versus straight bonds, so if the convert plus hedge costs more than issuing a senior bond it doesn’t make sense,” he said. Petit said recent redemptions meant there was cash to be redeployed on new issues, helped by strong current appetite for the energy sector in particular. “That is why the equity-neutral market could reopen for some issuers but not all,” he said. “I think investors will probably be more selective than they were five years ago.” Opportunity knocks Increased long-only participation in equity-linked deals has provided an opportunity on both pricing and structure, with bankers saying that the majority of interest for Iberdrola came from outright investors. Equity-linked bankers have been talking up the rise in rates and increased volatility as the perfect backdrop for the product all year. As the cost of debt has spiralled and some debt markets have been shut, issuers have lately turned to equity-linked. There are more NDCB redemptions to come as many of those printed in 2018 came with five-year tenors. “If the likes of Vinci, BP and Telefonica that did equity-neutral deals a few year
There is potential for a revived CS First Boston to shine again as a standalone New York-headquartered capital markets and advisory firm and investors are showing interest in taking a stake. But much will hinge on how many top dealmakers the bank can keep, how its ECM, DCM and research platforms look after the carve-out, and how it will work with Credit Suisse. Industry sources said "CSFB: the sequel" has a chance of success as it will be rooted in the deep and lucrative US capital markets and Michael Klein could galvanise the firm. Klein is a former star Citigroup M&A banker who joined Credit Suisse’s board in 2018 and has now been charged with running CSFB. CSFB will be a spin-off of Credit Suisse’s advisory and capital markets activities. The new firm will be based in New York and outside investors will be invited, allowing the Swiss bank to sell down its stake over time. Klein is expected to merge his own M Klein and Co advisory firm into CSFB in return for an equity stake. Former Barclays CEO Bob Diamond’s Atlas Merchant Capital is interested in investing, but it is too early to say whether it will go ahead, two sources said. Credit Suisse has said a “highly respected investor” has made a US$500m “hard commitment” to invest, but the investor has not been named. There are key elements for optimism, in addition to CSFB's strong position in US markets. It is a top-tier franchise in M&A, ECM and serving financial sponsors; it will be focused on less capital-intensive areas; Klein is aiming for a "partnership culture" to build on the entrepreneurial spirit long championed at the firm; and it has a strong brand and history that should play well on Wall Street. But details on the structure of the new firm are sketchy. It first needs to set up a legal entity, and the spin-off may not happen until 2024, reflecting how much of the planning still needs to be done. “It’s ambitious. But judge us in two years, not now,” one insider said. Stabilising revenues in 2023 will be a challenge before the carve-out. Credit Suisse’s revenues from M&A advisory, debt and equity underwriting and syndicated loans in the first 11 months of this year were down 52% from a year earlier, far steeper than the 34% drop across the industry and the biggest drop among the top 15 banks, according to Refinitiv data. But it is still in seventh place for global fees, behind only the five US bulge-bracket firms and Barclays, showing the franchise is strong despite a run of scandals and blows. In the last two years Credit Suisse has still pulled in more in investment banking fees than UBS and HSBC combined. Klein knows that stopping the rot early next year is crucial to keeping staff and attracting investors, and bankers at the firm know that too. The reaction among current investors has been grim, however. Credit Suisse shares have slumped 39% since the restructuring plan was unveiled on October 27, and on Thursday hit SFr2.65, their lowest level for at least 33 years. That values the bank at barely US$11bn. Much of that decline is due to the drag of the bank’s SFr2.2bn rights issue. Credit Suisse also warned last month its investment bank will make another loss this quarter and the overall bank could lose SFr1.5bn. There has also been a dramatic outflow of funds from its wealth management arm. The share price fall also reflects wariness about the complex spin-off of CSFB. The carve-out will include equity and debt capital markets teams, but research and trading platforms will sit with within Credit Suisse in its markets division, leaving many to wonder whether such a model is workable. ECM and DCM also need distribution capabilities, which again look like they will sit in sales and trading in Credit Suisse. “If anyone can pull the First Boston idea off, Klein can. He was a great motivator at Citi,” said a senior banker who previously worked with Klein. “But it&rs
Daiei Kankyo and Skymark Airlines are building early momentum with international investors for IPOs totalling up to ¥75.8bn (US$556.7m) at the end of a lacklustre year for ECM in Japan. The international books for both deals were covered on the first day of bookbuilding on Monday, even after the companies decided to sell more shares to investors based outside Japan. A range of investors showed interest in the Daiei Kankyo offering. Having held about 100 one-on-one management meetings and several group meetings, the waste management and resource recycling company received strong feedback from international long-only and ESG-focused long-only investors. "Investors like the company's ESG angle and its potential gain in waste management market share," a person familiar with the deal said. The company has a share of about 1% of Japan's ¥7trn-per-year waste management market, the person said. The market is highly fragmented, with Tokyo Stock Exchange-listed companies together accounting for 2.9% based on net sales for the latest fiscal year, according to Daiei Kankyo's prospectus. On Thursday, SMBC Nikko, which is leading the float, sent a message to investors that the international books would close on December 2 at 12pm Tokyo time, instead of December 3 at 2am. Following the strong indicative demand, 5% of the deal was shifted from the domestic to the international tranche for a 55:45 split. Nevertheless, analysts are concerned about revenue growth. "Volumes have been under pressure and it's only the recent increase in prices which has supported revenue growth. It's unclear to us how sustainable these price increase trends are," Sumeet Singh, head of research at Aequitas Research, said in a report. Daiei Kankyo's average contracted treatment prices have increased 30% from the 2019 to 2022 fiscal years. The volume of waste it collected from customers decreased by 5% and 1.7%, respectively, in the 2021 and 2022 fiscal years, which end in March. It is offering 32.1m shares (3.5m primary/28.6m secondary) with a greenshoe option of 4.82m shares in an indicative price range of ¥1,270–¥1,350, for an expected market capitalisation of about ¥135bn at listing. Funds raised from listings in Japan have dropped 68.6% to US$1.57bn year to date, while equity and equity-related issuance is down 82.4% at US$7.04bn, according to Refinitiv data. Fly again Low-cost carrier Skymark Airlines, which was delisted in 2015 following bankruptcy, has also set the ball rolling on a TSE listing. It applied for a relisting in October 2019 but put the plan on hold after the coronavirus pandemic hit global air travel. A fund managed by Capital International Investors has committed to purchase about ¥5.55bn of the international tranche. An ECM banker said the fund's participation drew more orders as it boosted investor confidence. “There is some sensitivity in the book but investors should be happy with the top of the range,” a person familiar with the matter said. It also shifted 5% to the international from the domestic tranche for a 50:50 split, including the greenshoe. However, analysts are concerned about the business's focus on domestic flights. "The firm did manage to recover post-restructuring and perform in line with its peers, however, its operations are only limited to domestic flights, while its peers also have international exposure," said Ethan Aw, an equity analyst at Aequitas Research, in a report. Skymark is offering 27.8m shares (13.1m primary/14.7m secondary) with a greenshoe option of 4.17m shares in an indicative price range of ¥1,150–¥1,170. UDS Airlines Investment and investment fund Integral are the selling shareholders. Both deals will be priced on December 5 at the earliest and the shares are due to list on December 14. Bank of America, Daiwa and Morgan Stanley are the joint global coordinators and international joint bookrunners of the Skymark deal. Bank of America, Daiwa and Mits
The equity-linked rally in the EMEA region continued on Wednesday with the return of Spanish utility and market regular Iberdrola, which raised €450m from an upsized green convertible bond that also marked a revival of the non-dilutive structure that had not been seen in Europe since 2018. Non-dilutive, or equity-neutral, convertible bonds formed a substantial part of equity-linked issuance in Europe from 2015 to 2018. Their prominence was due to the low rates environment and came despite any evident enthusiasm from the buyside or sellside. Investors disliked the extremely aggressive pricing required to make such CBs cheaper than straight debt, while bankers were not keen on the small fees for what was in effect a debt surrogate. The most recent non-dilutive was in September 2018 when Glencore tapped its US$500m zero-coupon 2025 paper for another US$125m. A few weeks before that, Adidas printed €500m five-year non-dilutive converts that had a negative yield of 0.73%. As the name suggests there is no chance of dilution as the issuer purchases a call option on its shares matching that embedded in the CB at the same time as issuing the CB. “At the moment, because of scarcity value, there is a lot of demand for strong investment-grade companies with a positive outlook like Iberdrola, which has a large renewable business during an energy crisis,” said Javier Pollan, head of EMEA equity-linked at Citigroup. “With the recent expiry of the last Iberdrola instrument, outright investors had to look at this week’s deal in order to keep exposure to the name and that created sufficient appetite to price this deal aggressively and make it work.” Iberdrola issued €500m of NDCBs in 2015 and then tapped the bonds for a further €200m in 2020. They matured in early November. Thierry Petit, head of EMEA equity-linked at BNP Paribas, said: “It is not a coincidence that Iberdrola priced an equity-neutral CB two weeks after its previous equity-neutral CB matured ... We’re playing on scarcity and if you want to be exposed to Iberdrola, the only way is to participate in the new issue." Even so, global coordinators Barclays and Goldman Sachs had been waiting three weeks to launch the offer into the right market. The wait was worth it as the five-year issue was upsized from €400m at launch. The bonds will pay a coupon of 0.8% and came with a fixed premium of 20%. A banker on the transaction said "in a world of higher rates and higher cost of debt, issuers are trying to tap any pocket of demand to reduce the cost of debt". Pollan said equity-neutrals might be the way to bring some investment-grade names to the structured equity market. But he said such deals only work in some circumstances. "The whole purpose of non-dilutives is to create an arbitrage versus straight bonds, so if the convert plus hedge costs more than issuing a senior bond it doesn’t make sense,” he said. Petit said recent redemptions meant there was cash to be redeployed on new issues, helped by strong current appetite for the energy sector in particular. “That is why the equity-neutral market could reopen for some issuers but not all,” he said. “I think investors will probably be more selective than they were five years ago.” Opportunity knocks Increased long-only participation in equity-linked deals has provided an opportunity on both pricing and structure, with bankers saying that the majority of interest for Iberdrola came from outright investors. Equity-linked bankers have been talking up the rise in rates and increased volatility as the perfect backdrop for the product all year. As the cost of debt has spiralled and some debt markets have been shut, issuers have lately turned to equity-linked. There are more NDCB redemptions to come as many of those printed in 2018 came with five-year tenors. “If the likes of Vinci, BP and Telefonica that did equity-neutral deals a few year
Australian banks continue to tap receptive covered bond markets home and away in a further vindication of local legislation passed in 2011 which first allowed them to issue these instruments. Commonwealth Bank of Australia extended the run of major bank overseas supply with a US$1.5bn three-year Yankee sale on Monday, a day before non-major ING Bank (Australia) raised A$1.25bn (US$838m) from a domestic three-part trade. "Covered bonds are the right product to secure funding when conditions are more challenging as they have been recently, especially offshore where investors have a clear preference for defensive assets high up the capital structure,” said Suzy Ramos, director of syndicate at ANZ. Covered bonds, which are backed by both the issuer and pools of residential mortgages, were not available to Australian banks during the financial crisis, which left them requiring expensive and embarrassing government guarantees to access wholesale markets in 2008 and 2009. In addition to providing reliable access to wholesale funding in challenging times, covered bonds offer a welcome source of relatively cheap funding when clearing margins are at multi-year highs. Australian covered bonds typically pay spreads equal to around 70%–85% of unsecured note spreads, depending on the market, an attractive carrot for banks facing hefty funding needs to help meet upcoming Term Funding Facility redemption towers. The Reserve Bank of Australia’s A$200bn TFF, which ran from March 2020 to June 2021, provided banks with three-year funding at a fixed rate of 0.25%, later lowered to 0.1%, that needs to be financed from next year. The four majors accessed all their TFF allowances for a combined A$133bn, while total bank drawdowns reached A$188bn. Australian majors have been tapping the local senior unsecured space in some size as Australia and New Zealand Banking Group and National Australia Bank underlined with their recent record-breaking A$4.75bn four-part sales, though they had to pay up for the privilege. For example, the five-year notes within Westpac's A$2.7bn four-trancher on November 7 cleared at 123bp – the widest margin by a major since 2012. Covered bonds are not a realistic proposition for the majors in such volume at home, because asset managers and bank balance sheets know them inside out and prefer to hold senior unsecured paper that delivers more juice. In the US and Europe, however, investor pools are larger and more diverse, including those that require the security of the covered bond format and/or Triple A ratings and appreciate the pick-up over, for example, SSAs and eurozone and Canadian covered bonds. Australia being in a relatively stable part of the world is another supportive factor, though one Sydney-based DCM manager noted that more questions were being asked about the Australian housing market in the face of rising interest rates and falling house prices. CBA’s latest trade takes total major bank offshore covered issuance in US dollars, euros, sterling and Swiss francs in 2022 to over US$20bn-equivalent from 16 deals, according to IFR data. In 2021, they raised less than US$3bn-equivalent in euros, sterling and Swiss francs. Westpac is the only major bank to access the local covered segment this year with a A$2bn three-year print in May. Non-majors have been more active locally, with ING Bank (Australia), Suncorp-Metway, Bank of Queensland and a debut from Bendigo and Adelaide Bank raising a combined A$3.8bn this year versus just A$1bn from two ING transactions in 2021.
Bellwether