After turbulent market conditions kept issuers waiting, Nordea Bank and ING Groep at last kicked off European banks' post-blackout senior unsecured issuance with respective senior non-preferred and holdco senior trades on Monday, attracting multi-billion order books with triple digit spreads. The deals are the first single currency senior unsecured transactions in the FIG space since May 5, when Morgan Stanley sold a €3bn two-part holdco senior trade during a short-lived market rally. The dramatic volatility that followed limited banks' euro issuance to covered bonds and meant that an already well-stocked pipeline of senior unsecured and capital trades continued to grow, as banks waited for opportunities after reporting their first quarter results. "At last, we have some senior supply," said a banker. "It's great to see these trades go well - these were the right names to reopen the market." Nordea was first on screens, marketing a seven-year senior non-preferred with initial price thoughts of mid-swaps plus 125bp area. Leads Barclays, Bank of America, Natixis, Nordea and Societe Generale went on to set the spread at 105bp and the size at €1bn, with the final book standing above €2.1bn. After recent rates volatility tempered investor appetite for duration, market participants said it was positive to see that it was not just the short end of the senior unsecured curve that was open and that the seven-year tenor was also an option, at least for top tier banks. Some bankers said it was a surprise to see a bank eschew cheaper-to-deliver shorter tenors and be willing to pay for a longer dated deal while spreads are elevated. They suggested Nordea's choice reflected the view - held by many market participants - that funding costs are unlikely to go lower in the near-term. "Maybe Nordea rings the alarm bell for other issuers, showing that spreads are not going to improve in the near-future. Maybe it resets expectations in terms of current [secondary market] spreads not just being something reflected by screens," said a second banker. The deal's fair value was seen in the low to mid 90s, translating to a new issue concession in the context of 10bp to the low teens. Supported by dedicated ESG demand and a more defensive tenor, ING was able to garner the largest order book of the day and to exercise greater pricing leverage for its four-year non-call three green holdco senior. Leads BNP Paribas, Credit Suisse, ING, JP Morgan, NatWest Markets and Societe Generale opened books with IPTs of mid-swaps plus 135bp area. The spread was set at 110bp and the size at €1.5bn, with books last reported above €3bn, excluding JLMs. Bankers saw fair value for the deal in the low to mid 100s, implying ING arguably paid a premium as low as 5bp. "That looks and feels skinny versus what we have seen recently, but that can be justified by [the deal] being short-dated and being green," said a third banker. A case of history repeating While bankers noted that the premiums paid by ING and Nordea were not elevated compared with preceding supply, those premiums were paid on top of spreads that have widened significantly in recent weeks. The upwards trajectory of top tier European banks' funding costs in the SNP/holdco senior market can be charted through ING and Nordea. Monday's deals represented the second time this year the two issuers re-opened the market in the wake of a repricing. On February 9, after a week-long hiatus in supply and a sell-off that followed ECB and Bank of England meetings, ING sold a dual-tranche €3bn five-year non-call four and nine-year non-call eight transaction while Nordea sold a €1bn five-year green SNP. ING priced its two tranches at 85bp and 115bp, respectively, while Nordea priced its deal at 60bp. At the time, the iBoxx EUR Banks Senior Bail-in index was at 70bp. On Friday, it closed at 132bp. "For their seven-year today, Nordea started [at IPTs] with more than double the spread they paid for
Three high-grade corporate borrowers hit the euro bond market on Monday to stay ahead of a potential surge in supply later this week and taking advantage of pent-up demand. All three deals, however, had to pay double-digit new issue premiums, although the debut nature of Suez's (Baa2, Moody's) €2.6bn triple-tranche green offering made it difficult to derive fair value. Finnish issuer UPM-Kymmene (Baa1/BBB, Moody's/S&P) and German company Wuerth (A, S&P) tapped the market with single-tranche trades of €500m and €600m, respectively. "It's a relatively successful day where investors got good value," said a syndicate official. French water management company Suez, formerly known as Sonate Bidco, went for size for its inaugural offering after it acquired old Suez's water and waste assets from Veolia. A €750m five-year, €850m eight-year and €1bn 12-year landed at mid-swaps plus 65bp, 90bp and 118bp, which one syndicate banker described as paying concessions of around 20bp with reference to Veolia's secondary curve. The deal gained orders of over €9.4bn. Initial price thoughts were 100bp area, 120bp area and 150bp area. Suez's global coordinators were BNP Paribas, Credit Agricole, Natixis, Santander and Societe Generale. BBVA, ING, IMI-Intesa Sanpaolo, La Banque Postale, NatWest Markets, Morgan Stanley, MUFG and UniCredit were active bookrunners. Despite being a Single A name, Wuerth paid a premium of 15bp, according to a lead. The 8.25-year senior note launched at 60bp after gaining books of more than €1.1bn via DZ Bank, Santander, UBS and UniCredit. IPTs were mid-swaps plus 75bp–80bp area. Some syndicate bankers saw the deal as paying as high as 25bp, but the lead said the German manufacturer has only two old bonds outstanding, with levels that were not reflective of current market conditions. "We knew Suez was coming so not a big surprise there but there's a pipeline building up, so we didn't want to be thrown under the bus by waiting," said the lead. "The market was not overly constructive but not bad either. The issuer is also not the riskiest name and has some tailwind through being a company that everyone knows in Germany. It's a low beta name with a domestic bid." Finnish forest industry company UPM paid the smallest concession of 13bp after landing at 88bp, according to syndicate bankers. Books for the seven-year no-grow green note peaked at over €1.5bn before settling in at more than €1.25bn via Citigroup, Commerzbank, Credit Agricole, Nordea and Swedbank. IPTs were mid-swaps plus 115bp area. All three deals are eligible for the ECB's CSPP bond-buying programme, reinforcing the strong technicals arising from recent sluggish bond supply. "The technical is helping, with supply down so much last month," said a syndicate head. While May is historically a busy month for euro IG corporates, bond sales so far this month have come in at around €13.8bn, including Monday's trades, largely in line with last year's €13.1bn, according to IFR data. Last month's sales, however, were down over 50% on a year-on-year comparison at €8.15bn. "We're expecting a busier week than last week, and we're aware of some other trades that we're not engaged in," said the syndicate head. The first syndicate official said "not all trades that wanted to come last week came," so there could be a surge in sales if market conditions hold up.
Raiffeisen Bank International showcased its ability to tap capital markets despite being one of the European banks most exposed to Russia, although the issuer had to compensate investors handsomely to get the deal away. It garnered more than twofold demand for a €500m five-year covered bond on Monday, having forked out the juiciest new issue premium seen in the Austrian covered space in over three years. "It's a great outcome for RBI and if you consider that Luminor Bank didn't perform really well last week, it's an encouraging result even if we paid a lot compared to other Austrian names," said a lead manager. "Their credit standing was affected by Russia and Ukraine, but the fact that Austrian supply was so heavy also had an impact. We heard that there are starting to be fewer lines for Austrian covered bonds." Credit Agricole, DZ Bank, Natixis, RBI and UniCredit held a roadshow early last week but delayed execution as the market tone deteriorated in the latter part of the week. "The end of the week, especially for covereds, was not that good. We have seen a widening of 2bp or 3bp which also would have had an effect on new issue premiums," one banker away from the trade said. Following investor feedback last week which pointed towards pricing in the mid-swaps plus high 10s to 20bp, books opened on Monday at mid-swaps plus 25bp area for the no-grow trade. The bond landed at plus 23bp after orders passed the €1bn mark (ex JLM). The order book closed around €1.3bn (including €75m of lead interest) and was of good quality, the leads said. "They started a bit wider than I thought they would when they first announced the trade last Tuesday but covered bonds have worked a bit less well since then," said a second banker away. "And maybe they could have tightened by 1bp more, but all-in-all it is in line with expectations." Market participants said RBI left 8bp-10bp of new issue premium on the table. For comparison, since the onset of the war in Ukraine, five-year Austrian covered supply has priced within a mid-swaps plus 7bp-10bp range and with NIPs of around 2bp. "The new issue concession for them was higher than other more established names due to the war in Ukraine, but generally you can get trades done if you are willing to pay up," said the second away banker, adding that RBI moved early in a week that is shaping up to be heavy in covered supply. "I don't think you will see trades this week with no or minimal new issue premiums; it's going to be more in the context of 3bp-4bp for the majority of trades," he said. UniCredit Bank Austria and Raiffeisenverband Salzburg will keep the Austrian momentum going this week; the first is readying a €500m no-grow six-year debut green covered bond for Tuesday while the latter is marketing an inaugural euro five-year sub-benchmark mortgage-backed transaction for Wednesday or Thursday. Equitable Bank, HSBC Canada, and Hamburg Commercial Bank are also queuing up, providing a range of issues which will offer a detailed picture of the state of the covered bond market.
Raiffeisen Bank International showcased its ability to tap capital markets despite being one of the European banks most exposed to Russia, although the issuer had to compensate investors handsomely to get the deal away. It garnered more than twofold demand for a €500m five-year covered bond on Monday, having forked out the juiciest new issue premium seen in the Austrian covered space in over three years. "It's a great outcome for RBI and if you consider that Luminor Bank didn't perform really well last week, it's an encouraging result even if we paid a lot compared to other Austrian names," said a lead manager. "Their credit standing was affected by Russia and Ukraine, but the fact that Austrian supply was so heavy also had an impact. We heard that there are starting to be fewer lines for Austrian covered bonds." Credit Agricole, DZ Bank, Natixis, RBI and UniCredit held a roadshow early last week but delayed execution as the market tone deteriorated in the latter part of the week. "The end of the week, especially for covereds, was not that good. We have seen a widening of 2bp or 3bp which also would have had an effect on new issue premiums," one banker away from the trade said. Following investor feedback last week which pointed towards pricing in the mid-swaps plus high 10s to 20bp, books opened on Monday at mid-swaps plus 25bp area for the no-grow trade. The bond landed at plus 23bp after orders passed the €1bn mark (ex JLM). The order book closed around €1.3bn (including €75m of lead interest) and was of good quality, the leads said. "They started a bit wider than I thought they would when they first announced the trade last Tuesday but covered bonds have worked a bit less well since then," said a second banker away. "And maybe they could have tightened by 1bp more, but all-in-all it is in line with expectations." Market participants said RBI left 8bp-10bp of new issue premium on the table. For comparison, since the onset of the war in Ukraine, five-year Austrian covered supply has priced within a mid-swaps plus 7bp-10bp range and with NIPs of around 2bp. "The new issue concession for them was higher than other more established names due to the war in Ukraine, but generally you can get trades done if you are willing to pay up," said the second away banker, adding that RBI moved early in a week that is shaping up to be heavy in covered supply. "I don't think you will see trades this week with no or minimal new issue premiums; it's going to be more in the context of 3bp-4bp for the majority of trades," he said. UniCredit Bank Austria and Raiffeisenverband Salzburg will keep the Austrian momentum going this week; the first is readying a €500m no-grow six-year debut green covered bond for Tuesday while the latter is marketing an inaugural euro five-year sub-benchmark mortgage-backed transaction for Wednesday or Thursday. Equitable Bank, HSBC Canada, and Hamburg Commercial Bank are also queuing up, providing a range of issues which will offer a detailed picture of the state of the covered bond market.
The European Stability Mechanism inked its highest coupon on a short-dated deal since 2014 on Monday, further illustrating the brutal sell-off that has gripped rates markets in recent weeks. The European supranational, which made a quick intraday dash into the market, priced a €2bn no-grow June 2027 with a 1% coupon, the highest for a trade in that part of the curve since March 2014, according to IFR data. "I think the markets are in a much better space now than they have been," a DCM banker said. "On the rates side, you now can at least have a two-way debate whether rates have value or not. There's a lot more that's priced into the curve than there used to be." The 10-year Bund yield passed the 1% mark earlier this month, the first time it had hit that level since 2015. "Spreads aren't quite there but yields definitely are," the DCM banker said. "This should really help the EIB." EIB mandated Bank of America, BNP Paribas, JP Morgan and NatWest Markets for a debut Climate Awareness June 2032 EARN expected to emerge as early as Tuesday. "Investors will be getting something around 1.4%, maybe a bit higher, that will feel quite novel for them, and is certainly higher compared to a couple of months ago. But issuers should remember that this confidence around rates is not a given, they shouldn't fall into the trap that it won't get worse." EIB has not printed a coupon above 1% on a euro benchmark trade with a 10-year tenor since 2014. On the other side of the coin, spreads are still attractive for issuers. The 25bp through mid-swaps spread at which the ESM transaction priced was a record tight for the issuer in that part of the curve and offered no new issue concession. It was the tight end of the less 22bp area guidance. "The moves we've seen in swap spreads have made things very interesting," a syndicate banker said. "We've seen the most liquid names like KfW massively outperform the rest of the SSA world. They look very expensive versus Bunds and OATs and are around 50bp through mid-swaps. That tightening hasn't filtered through to other names, so it's still attractive to buy ESM, which also offers a nice pick-up versus EIB." Commerzbank analysts wrote that their on-the-run 10-year KfW swaps spread was trading at its richest since 2015 last week, leaving the spread differential with Bunds at an all-time high. "I call this the dollarification of the euro market," the syndicate banker said. "Demand is very much driven by the relative value between SSA names and OATs, Bunds. That's driving central banks' demand."Market paradox While the €12.7bn of demand for ESM was far from a record, it was still a very respectable outcome given the transaction priced flat to the issuer's curve. "There's a real paradox in the market right now," another syndicate banker said. "For years, investors complained that rates were far too low, we were in deep negative territory yet we had huge order books, but the reverse has happened. Clearly, that was due to QE and now investors have had to adjust to a brutal rise in rates." He said that five-year was an obvious choice for ESM given it did not have an incentive to go long and, with an inverted swaps curve and an attractive spread versus govvies, it was a great spot on the curve. "While there have been times when conditions have been really tough and difficult to navigate this year, conditions overall are still good," he said. "A deal like ESM clearly shows that investors have plenty of cash, especially given that they haven't been able to deploy it when windows have been shut," the second syndicate banker said. "I think there's a bit of tendency to scare ourselves, but you have to remember, QE isn't stopping in Europe, the ECB trajectory is very different from that of the Fed or Bank of England." Barclays, Credit Agricole and DZ Bank were lead managers on ESM.
Banks that have been pre-marketing three chunky financings backing the acquisitions of Morrisons, William Hill and Unilever's tea business Ekaterra are now faced with a European leveraged finance market in turmoil as lenders shut up shop and debt costs soar. The three deals are the largest financing packages in a leveraged finance pipeline of around €25bn-equivalent of M&A underwrites. Banks have been pitching investors on the trades for weeks in a bid to shift the bulkier deals on their balance sheets into what was thought likely to be a stabilising market after Easter. However, those efforts now look much further from the finish line after the market took a drastic turn for the worse, with investors fretting over comments made by central banks around inflation and the Bank of England's warnings of a recession in the UK. In secondary markets, high-yield bonds traded down by around four points from May 5 through to May 9, while leveraged loans traded down by a point to a point-and-a-half, said bankers. As floating-rate instruments, leveraged loans have been more insulated from rate-related turbulence than the fixed-income market, and so the move was notable. Until levels settle, it is unlikely that the primary market will see any jumbo deals. "The [change in] mood was so sharp and so sudden that it took everyone by surprise," said one senior leveraged finance banker. "We thought we had found a more stable footing but then the entire market took a leg down. Concerns around what the Fed and the other central banks are doing are pretty acute – and obviously that feeds into growth and rate expectations." UK supermarket Morrisons had been slated for a mid-May launch, while Ekaterra was expected to come towards the end of May. UK gambling company William Hill's launch was also considered to be imminent, with leads currently evaluating financing options and market conditions. The lead banks on Morrisons are now looking at the idea of privately placing yet another chunk of the financing with investors, rather than taking the entirety of the remainder to market. Leads have been pre-marketing the deal on and off since November. Fees at risk As all three deals were underwritten last year, banks could now be facing a tight squeeze to get the deals out under caps – if that is even possible. Average yields for Single B junk bonds have soared to 6.8%, up from 4.1% at the beginning of the year, according to a second banker. Meanwhile, leveraged loans carrying a Single B rating have widened to 6.1%, up from 4.04% over the same period. Lead banks on the delayed financing backing Clayton, Dubilier & Rice's purchase of Morrisons have already lost money on two private sales of bonds. The latest sale saw Goldman Sachs, BNP Paribas, Bank of America and Mizuho privately place £1.075bn of senior secured sterling notes at a price of 89, according to market sources. Yields were capped at 5.5%. Banks have around £3.3bn-equivalent in financing left to shift on the Morrisons deal. Meanwhile, 888's purchase of the non-US operations of William Hill is being backed with a £2.1bn financing package and CVC Capital Partners' purchase of Unilever's tea business is being backed by a €2.1bn-equivalent term loan B. "[Morrisons, William Hill and Unilever] are individually quite chunky and in aggregate very chunky, while the businesses themselves are somewhere in between OK and moderately tricky," said one leveraged loan investor. "I wouldn't say they're straightforward. The market will buy all deals at a level, but it might not feel comfortable for the underwriters." Even a €150m junk bond for French car rental company Europcar wasn't able to make it through the market, with the sudden shift in tone forcing leads to pull the deal. "The market moved to extreme levels from Thursday to Monday, and it's too volatile to price risk right now," said a third banker. "That M&A backlog that everyone thought was coming im
The European Stability Mechanism inked its highest coupon on a short-dated deal since 2014 on Monday, further illustrating the brutal sell-off that has gripped rates markets in recent weeks. The European supranational, which made a quick intraday dash into the market, priced a €2bn no-grow June 2027 with a 1% coupon, the highest for a trade in that part of the curve since March 2014, according to IFR data. "I think the markets are in a much better space now than they have been," a DCM banker said. "On the rates side, you now can at least have a two-way debate whether rates have value or not. There's a lot more that's priced into the curve than there used to be." The 10-year Bund yield passed the 1% mark earlier this month, the first time it had hit that level since 2015. "Spreads aren't quite there but yields definitely are," the DCM banker said. "This should really help the EIB." EIB mandated Bank of America, BNP Paribas, JP Morgan and NatWest Markets for a debut Climate Awareness June 2032 EARN expected to emerge as early as Tuesday. "Investors will be getting something around 1.4%, maybe a bit higher, that will feel quite novel for them, and is certainly higher compared to a couple of months ago. But issuers should remember that this confidence around rates is not a given, they shouldn't fall into the trap that it won't get worse." EIB has not printed a coupon above 1% on a euro benchmark trade with a 10-year tenor since 2014. On the other side of the coin, spreads are still attractive for issuers. The 25bp through mid-swaps spread at which the ESM transaction priced was a record tight for the issuer in that part of the curve and offered no new issue concession. It was the tight end of the less 22bp area guidance. "The moves we've seen in swap spreads have made things very interesting," a syndicate banker said. "We've seen the most liquid names like KfW massively outperform the rest of the SSA world. They look very expensive versus Bunds and OATs and are around 50bp through mid-swaps. That tightening hasn't filtered through to other names, so it's still attractive to buy ESM, which also offers a nice pick-up versus EIB." Commerzbank analysts wrote that their on-the-run 10-year KfW swaps spread was trading at its richest since 2015 last week, leaving the spread differential with Bunds at an all-time high. "I call this the dollarification of the euro market," the syndicate banker said. "Demand is very much driven by the relative value between SSA names and OATs, Bunds. That's driving central banks' demand."Market paradox While the €12.7bn of demand for ESM was far from a record, it was still a very respectable outcome given the transaction priced flat to the issuer's curve. "There's a real paradox in the market right now," another syndicate banker said. "For years, investors complained that rates were far too low, we were in deep negative territory yet we had huge order books, but the reverse has happened. Clearly, that was due to QE and now investors have had to adjust to a brutal rise in rates." He said that five-year was an obvious choice for ESM given it did not have an incentive to go long and, with an inverted swaps curve and an attractive spread versus govvies, it was a great spot on the curve. "While there have been times when conditions have been really tough and difficult to navigate this year, conditions overall are still good," he said. "A deal like ESM clearly shows that investors have plenty of cash, especially given that they haven't been able to deploy it when windows have been shut," the second syndicate banker said. "I think there's a bit of tendency to scare ourselves, but you have to remember, QE isn't stopping in Europe, the ECB trajectory is very different from that of the Fed or Bank of England." Barclays, Credit Agricole and DZ Bank were lead managers on ESM.
The sudden disappearance of liquidity in the secondary corporate bond markets in Europe is hitting primary issuance, with the pipeline of deals partially blocked because investors can't shift bonds they already own to buy new deals, while many issuers are refusing to pay up enough to convince investors to get back in the market. Secondary liquidity has been hit hard by macro volatility, with dealers calling conditions the worst they have seen since the second quarter of 2020 when markets were whacked by the onset of the coronavirus pandemic. But unlike two years ago, when interventions prevented markets from seizing up, central banks and governments are not riding to the rescue. Dealers' inability to process and warehouse rate and credit risk has sharpened the impact of the bond bear market, while investor appetite has been greatly diminished by the sell-off in the equity markets. In the aftermath of the 2008 financial crisis, a hike in banks' capital requirements and other efforts to rein in so-called casino banking led to a stark decline in market liquidity, which in turn curtailed dealers' market-making capacity and willingness to hold inventory. The resulting drop in secondary market liquidity was eased when the European Central Bank (and to a lesser extent the Bank of England) came in to support the market in June 2016 because dealers knew there was always a backstop bid. But with central banks now moving to end quantitative easing, that support mechanism has gone and money managers are struggling to come to terms with a significantly different world. "It’s very difficult to sell or buy, particularly smaller issues where spreads have widened the most, and what we might want to buy has relatively wide bid/offer spread. It’s similar to what we saw in March 2020 and 2016," said Steve Hussey, head of financial institutions credit research at AllianceBernstein. A London-based fund manager said that in the past couple of weeks it felt as if investment banks' traders had been given a tap on the shoulder by the people in charge of how much risk a bank can take and told to reduce their risk positions – in turn further exacerbating the drying up of liquidity. The iBoxx EUR corporate index asset-swap spread has widened 30bp from 76bp in mid-April. "The liquidity in the secondary market is extremely weak right now. The majority of market participants are long cash bonds and using iTraxx to hedge their risk," said a syndicate desk head. Credit strategists at Bank of America point to volumes rising materially in the iTraxx CDS index and the options markets. At the same time they note a decline in bond trading in 2022, reversing the trend of improving conditions in the past three or so years, when supportive ECB policy and bond purchases provided a favourable backdrop. These credit derivative hedges have to some extent protected money managers from the 10.13% decline in the iBoxx EUR non-financial bond index this year. That is the biggest fall in the index since its inception in 1999, although it did fall 7.4% during the lows of 2020 before bouncing to end the year up 3.2%. The index has only suffered full-year declines twice – 1.8% in 1999 and 0.14% in 2015. Warning signs "It feels that people are very worried that we are going to see a further correction in stocks. A lot of people are selling, so who is going to be the other side for that risk?" asked the co-head of credit trading at a major US bank. Outflows in credit funds have been a feature for several months now, meaning many investors' cash balances are low. This has implications for primary because to participate in a new issue a cash-constrained investor may need to be offered a switch by DCM syndicate desks – an unattractive prospect for that bank's secondary trader to facilitate given widening spreads and poor market liquidity. This partly explains why new issue premiums are relatively high – because syndicate desks are increasingly looki
Banks that have been pre-marketing three chunky financings backing the acquisitions of Morrisons, William Hill and Unilever's tea business Ekaterra are now faced with a European leveraged finance market in turmoil as lenders shut up shop and debt costs soar. The three deals are the largest financing packages in a leveraged finance pipeline of around €25bn-equivalent of M&A underwrites. Banks have been pitching investors on the trades for weeks in a bid to shift the bulkier deals on their balance sheets into what was thought likely to be a stabilising market after Easter. However, those efforts now look much further from the finish line after the market took a drastic turn for the worse, with investors fretting over comments made by central banks around inflation and the Bank of England's warnings of a recession in the UK. In secondary markets, high-yield bonds traded down by around four points from May 5 through to May 9, while leveraged loans traded down by a point to a point-and-a-half, said bankers. As floating-rate instruments, leveraged loans have been more insulated from rate-related turbulence than the fixed-income market, and so the move was notable. Until levels settle, it is unlikely that the primary market will see any jumbo deals. "The [change in] mood was so sharp and so sudden that it took everyone by surprise," said one senior leveraged finance banker. "We thought we had found a more stable footing but then the entire market took a leg down. Concerns around what the Fed and the other central banks are doing are pretty acute – and obviously that feeds into growth and rate expectations." UK supermarket Morrisons had been slated for a mid-May launch, while Ekaterra was expected to come towards the end of May. UK gambling company William Hill's launch was also considered to be imminent, with leads currently evaluating financing options and market conditions. The lead banks on Morrisons are now looking at the idea of privately placing yet another chunk of the financing with investors, rather than taking the entirety of the remainder to market. Leads have been pre-marketing the deal on and off since November. Fees at risk As all three deals were underwritten last year, banks could now be facing a tight squeeze to get the deals out under caps – if that is even possible. Average yields for Single B junk bonds have soared to 6.8%, up from 4.1% at the beginning of the year, according to a second banker. Meanwhile, leveraged loans carrying a Single B rating have widened to 6.1%, up from 4.04% over the same period. Lead banks on the delayed financing backing Clayton, Dubilier & Rice's purchase of Morrisons have already lost money on two private sales of bonds. The latest sale saw Goldman Sachs, BNP Paribas, Bank of America and Mizuho privately place £1.075bn of senior secured sterling notes at a price of 89, according to market sources. Yields were capped at 5.5%. Banks have around £3.3bn-equivalent in financing left to shift on the Morrisons deal. Meanwhile, 888's purchase of the non-US operations of William Hill is being backed with a £2.1bn financing package and CVC Capital Partners' purchase of Unilever's tea business is being backed by a €2.1bn-equivalent term loan B. "[Morrisons, William Hill and Unilever] are individually quite chunky and in aggregate very chunky, while the businesses themselves are somewhere in between OK and moderately tricky," said one leveraged loan investor. "I wouldn't say they're straightforward. The market will buy all deals at a level, but it might not feel comfortable for the underwriters." Even a €150m junk bond for French car rental company Europcar wasn't able to make it through the market, with the sudden shift in tone forcing leads to pull the deal. "The market moved to extreme levels from Thursday to Monday, and it's too volatile to price risk right now," said a third banker. "That M&A backlog that everyone thought was coming im
The equity-linked market in EMEA is in a shocking state, with issuance in 2022 the lowest for 30 years, and yet bankers are optimistic – they have to be – that they can survive this period and the market backdrop will soon deliver deals. European equity-linked issuance year-to-date is just under US$977m, compared with the US$12.98bn recorded at the same point in 2021. In 2022 there have been just three deals (and one of those was for a European company listed in the US) versus 27 in 2021. Only 1992 fared worse at US$881.5m from 10 deals by May 12. The previous low this century was US$5.46bn from 19 trades in 2018. It is necessary to go back to 1985 for a deal count as low as this year at the same stage. The equity-linked market regularly closes for sustained periods, with the gap in issuance from July 2008 to March 2009 still strong in the memory of those who were around at the time. This year, Ireland’s Glanbia opened issuance in January and BE Semiconductor Industries followed in March so there has not been a prolonged absence of deals, though that also shows the market has not been closed to new issues. There have been a handful of occasions where deals have been shown to investors but weak feedback meant they did not launch. “We have gone from an environment where every day was a good day to execute a transaction to one where you have days like those this week, where you would even struggle to print an investment-grade straight bond, let alone products lower down the credit spectrum,” said Javier Pollan, head of EMEA equity-linked at Citigroup. “No investor out there has made money in equity-linked so far this year, so investors are very sensitive to what they own, very sensitive to what is already out there and so very sensitive to what paper comes.” Performance from outstanding converts has been painful, in particular those from the tech space. Delivery Hero raised €1.25bn in September from a dual-tranche issue and the 2026 CBs are now trading around 70 and the 2029s at 60. Converts issued by ASOS and Just Eat Takeaway are also trading way below par. “Equity-linked is tough in a negative interest rate environment where spreads were very tight,” said Thierry Petit, head of equity-linked for EMEA at BNP Paribas. “Most corporates didn’t bother with a convertible instrument that is dilutive when they have very good access to the fixed-income market.” Rising costs That is now changing. There has hardly been any high-yield issuance of late other than names subject to bank underwriting that needs to be off-loaded. And issuers have consistently seen pricing in debt capital markets, particularly high-yield, moving upwards. “The evolution of market parameters and, in particular, interest rates and spreads is a game changer for us,” said Petit. “When everything costs zero, issuers will go for a non-dilutive instrument. But it now costs money to raise financing in debt capital markets and this is where converts could return again.” In addition to the expectation of a July increase in rates, the ECB is stopping its bond repurchase programme and that will have an impact on credit spreads, which will in turn feed into spiralling funding costs for corporates. “A crossover name raising a five-year straight bond could cost you 5%–6%, and that is assuming the market is open, which has not been the case for high-yield for weeks” said Petit. “So issuers are starting to turn to equity-linked as an alternative market, which is theoretically at least open and offering a much cheaper coupon.” Too volatile Volatility is a positive for equity-linked, as it makes the equity option embedded in the bonds more valuable, but right now the market is too volatile. Bankers agree some stability is required, without markets whipsawing day to day. "At the moment we are locked in a situation where the issuers that are more pressu
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