The carmaker, rated A3/A-, has already printed three tranches of fixed-rate notes this year and also a €300m two-year floater on January 8 via sole lead Citigroup.
But thanks to a lack of competing supply on Monday, it was able to generate enough demand to fix the spread on the January 2017 notes at three-month Euribor plus 30bp, at the tight end of price thoughts in the low 30s over, for a €500m bond via Societe Generale.
One banker on the deal said this meant that the paper was coming flat to fair value when referencing the company’s existing FRNs - an outcome that is particularly impressive in light of recent concerns surrounding the waning appeal of low-beta core paper.
Several market player last week warned that high-quality European corporate credits will be forced to offer juicier premiums and longer maturities on new bonds in order to compete with higher yields available from weaker names.
“The problem is that we’re in a very risk-on environment at the moment,” said Markus Steilen, syndicate manager at Commerzbank in Frankfurt.
“Investors aren’t seeking exposure to the safest possible names because they’re simply comfortable with more risk so that they can secure a higher yield.”
European strategists too are steering investors away from names rated Single A and higher, feeling that the yields on offer are too low - and likely to keep falling.
“We recommend keeping minimum exposure to low-beta names, and loading up in high-beta and high-yield as much as feasibly possible,” said Societe Generale strategists Suki Mann and Juan Valencia.
With the iTraxx Main index now at 70bp - close to a more than three-year low and 40% tighter than this time last year - they say current corporate yields are “unnervingly low”.
SECONDARY CHALLENGE
The somewhat lacklustre performance of recent bonds in the secondary market has underscored these difficulties facing higher rated borrowers.
Even though most have been able to recover, some of the deals from Daimler, as well as other German automakers and chemicals group BASF, initially traded as much as 5bp wider over mid-swaps on the break.
Investors are also saying that they are being lured by the plentiful supply of alternative paper on offer further down the ratings spectrum from subordinated hybrid bonds, as well as in the senior sector.
Names like Valeo, APRR and ASF all managed to generate vigorous demand over the past fortnight, with new issues trading as much as 5bp-6bp tighter in the secondary market.
Last Tuesday, Enel spin-off Snam printed €600m of 10-year bonds at mid-swaps plus 128bp that subsequently tightened by as much as 6bp despite offering just a 4bp premium. Order books topped €1.7bn.
On Thursday, Telecom Italia printed its first bond as a junk-rated corporate - a €1bn seven-year offering that attracted a massive book of more than €7bn - while French investment company Wendel, rated BB+ by S&P, on Tuesday attracted a 7.5-times subscribed book on its €400m seven-year trade.
Leads said this chunky order book was down, at least in part, to a substantial bid from traditional high-grade buyers.
RWE DIVESTMENT
With no other deals in the primary market, bankers on Monday were given the opportunity to focus on other headlines and the impact thereof on secondary and CDS levels.
The cost of insuring German utility RWE’s debt against default edged wider, after sources told Reuters on Friday that bids due on Monday for the company’s oil and gas exploration offshoot would value the unit well below previous expectations.
By mid-morning, the company’s five-year CDS was bid around 2% wider on the day, at around 84bp, according to Markit.
Reuters reported that two people close to the negotiations had said that offers for DEA were expected to come in at about €4bn, less than the up to €5bn that sources said had been originally targeted by Germany’s second biggest utility.
Bids are broadly expected to be submitted from three groups: Wintershall, the oil and gas arm of German chemicals group BASF; Russian billionaire Mikhail Fridman, acting through his investment vehicle Letter One; and a consortium consisting of US private equity firm KKR and Kufpec, the international arm of Kuwait Petroleum Corp.
ISSUANCE REMAINS OPPORTUNISTIC
Eyeing the rest of the week, European corporate bond issuance is broadly expected to remain opportunistic.
“Because the market was very much open at the end of 2013, there is no sense of urgency in the primary market now,” one London-based syndicate banker said.
“There are a few corporates toying with the idea of printing bonds but I think that the market will largely be shaped by opportunistic transactions over the next weeks and into the thick of the earnings season,” he said.
One company in the pipeline that may issue as early as Tuesday is Digital Realty Trust.
The company, rated Baa2/BBB/BBB, earlier this month mandated Barclays, Deutsche Bank and Bank of America Merrill Lynch to arrange a series of meetings with fixed income institutional investors in the UK.
One source said, however, that the company was under no immediate funding pressure, so did not necessarily have to print before the reporting season.
Other bankers have spoken of at least one new hybrid bond being announced this week and some have speculated that carmakers, already having featured prominently in 2014’s issuance market, could return too.
Daimler has almost €25bn-equivalent of unsecured bonds - denominated in sterling, euros and US dollars - due to mature between now and the end of 2015 and bankers have said that it is keen to fund before issuance markets become more competitive later in the quarter.
Volkswagen and BMW have around €39bn and €20bn maturing over that time frame, respectively.
