Top banks stretch out lead in busy October

US high-yield issuers are heading into November with an air of caution, following a mixed month for deals that saw good-quality issues fly off the shelf while four transactions were pulled. Volumes for October tallied US$26.92bn from 41 tranches, according to IFR data, and bankers say that we could see as much as US$30bn of supply in November that is likely to be front-loaded ahead of the Thanksgiving holiday on November 27. A few large M&A transactions are expected to be launched, including a US$3bn-plus deal for Scientific Games, which could emerge as soon as this week, while another sizeable US$1bn trade for Tibco is also being eyed. But DCM bankers warn that investors are likely to remain picky. “We’ll still see some opportunistic issuers come to market, especially as companies emerge out of blackout periods, but they are likely to be higher quality credits,” said one leveraged finance banker. “There’s been healthy activity for on-the-run names, but the more off-the-run storied credits have had a harder time. One of the reasons for that is investors do not have to chase every transaction right now and they’re just chipping away at deals they like.” One deal for M/I Homes was pulled last week (see separate story), and others were either downsized, rejigged or pushed into this week as investors demanded higher yields or greater protections. Steel company Evraz Canada downsized its five-year senior secured issue to US$350m from US$500m but priced it at par and in line with price talk to yield 7.5%. Essar Steel Algoma will now look to price its US$625m dual-trance issue this week with tighter covenants. The latter had aimed to price its transaction on Wednesday, having announced price talk on the five-year at 8% area and 10.5% area on the seven-year. Charter completes needs Investors could not get enough of other deals meanwhile, with well-regarded Charter Communications more than doubling the size of its dual-tranche bond mid-week to US$3.5bn from US$1.5bn on a book heard to be north of US$9bn. The deal completes the debt needed to purchase Time Warner Cable subscribers from Comcast, having raised a US$3.5bn loan in August that also financed the deal. “The company could have raised all the cash it needed in August, but it got caught in volatile conditions when outflows were huge,” said the banker. “It saw a window on Wednesday, printing both bonds with a 5% handle. It now has long-dated unsecured capital at financing costs near its all-time lows, with bonds that came even cheaper than the loan.” Friday ended on a high note with the HY CDX 23 index up half a point at 107.05 and followed good news from Lipper, which reported US$1.567bn of inflows into high-yield funds for the period ended October 29. Stocks also saw a broad rally after the Bank of Japan boosted its stimulus programme, just days after the Fed wound down its years-long package of incentives. Media General Financing Sub priced an eight-year non-call three senior unsecured bond offering on Friday. Although the deal was delayed by a day, it ended up being upsized to US$400m and priced at 99.50 to yield 5.954%, at the tight end of 6.00%–6.25% price talk. A term loan running in tandem was also upsized to US$825m from US$325m. So far, there are just a handful of deals on the calendar. Optima Specialty Steel is heard whispering an 8% handle for a US$300m five-year non-call two senior secured deal as it looks to refinance existing debt and raise cash for general corporate purposes. Other deals include Canbriam Energy and MCSI. Canbriam Energy plans to raise a US$250m seven-year non-call three bond issue through Credit Suisse, while MCSI plans to raise a US$800m 10-year non-call five bond offering through JP Morgan.

Peru returned with its first international bond issue since 2012 on Thursday. First approaching investors with a new global sol-denominated 3.25bn soles (US$1.09bn) 2024 note offering, the sovereign later announced a US$500m tap of its existing dollar 5.625% 2050s. The deal is being done in combination with a cash tender targeting sol-denominated 9.91% 2015s and 7.84% 2020s, as well as US dollar-denominated 9.875% 2015s, 8.375% 2016s and 7.125% 2019s. The borrower is offering purchase prices on those bonds of 103.4, 116.25, 102.375, 111.625 and 120.625, respectively. Investors had the option either to tender for cash and exit their positions or use the cash to switch into the new notes. So-called switch operations like this are typically done with debt denominated in the same currency. “The goal was to de-dollarise buying back shorter-dated dollar paper for cash and issue new sol-denominated debt,” said a source close to the trade. At initial price thoughts of 6% area, the new global depositary notes were seen as cheap to a local sovereign curve that most bankers had at around 5.40% on an interpolated basis. “It is an eye-popping new-issue premium,” said one banker. “It will work because they went out cheap, but you have to question the logic of doing a local currency trade today.” Another banker expressed similar sentiment, saying that “there is a limited amount of how much you can do in soles, though the pension funds can come and buy in good size and there is more wiggle room to adjust pricing on local deals”. Still, with books heard reaching 8bn soles, the borrower was able to narrow guidance to 5.875% area before launching a 3.25bn soles 5.70% deal at a yield of 5.75%, which put it in line or a touch tighter to where Mexico’s 10-year Mbonos have been trading. Both Mexico and Peru are now rated at A3/BBB+/BBB+. In what seemed to be some reverse enquiry, leads were quick to announce a tap of its dollar denominated 2050s, which was eventually priced at 112.208 to yield 4.9%, or Treasuries plus 185bp, the tight end of initial price thoughts of 190bp over. Books were heard to be US$1.5bn in size and proceeds will be used to prefund for next year. According to one investor, the bonds had been trading at a mid-market price of 114.5 or a G-spread of 173bp, making final pricing seem reasonable enough. BBVA, Bank of America Merrill Lynch and Morgan Stanley acted as leads.

It isn’t often that you get to see exactly what banks have stuffed into their books, but one of the great benefits of the European Banking Authority’s stress tests is that dozens of banks across the eurozone are periodically forced to lift the veil. The latest exercise was the first glimpse inside the banks for about two years, and showed that banks across the currency bloc – and especially those in France, Italy and Spain – have been loading up on sovereign debt, mostly domestic government bonds. At a time of lacklustre growth and subdued demand for credit, it’s perhaps little surprise that banks have parked their cash in government bonds. The European Central Bank’s €1trn longer-term refinancing operations have added even more fuel to the fire, providing banks with cheap funds they can funnel into carry trades. And given that not that long ago Spanish and Italian government bonds were yielding 7% it has been what one bank CFO who bought billions of euros of Italian debt called, with considerable understatement, a “good trade”. But rules that allow banks to load up with as much sovereign debt as they want without having to set aside a single euro of capital also incentivise that carry trade, encouraging banks – especially those low on capital – to divert resources away from other types of lending, where capital requirements are more strict. National governments, which sign off on these rules, obviously have little incentive to change the current system: the zero weightings, after all, help ensure ample buyers for their debt. But the skewed rules risk shutting off credit to the private sector that so badly needs it. As it stands, eurozone banks are not fulfilling their role as credit intermediaries to the wider economy. In fact, given their record bond holdings – eurozone banks now hold €2.4trn of government bonds on their books, equivalent to 7.7% to all the assets they own – they look more like fund managers. And fund managers that seemingly haven’t heard of that d-word – diversification. Some banks have lent 10% or 15% of their entire balance sheet to a single creditor – their national government – despite a deterioration in many countries’ debt dynamics. Market memories can be short, but it is only two years since Greece restructured its debt, leaving banks with losses. Zero weightings may suit governments for the time being, but they are denying much-needed credit to the wider economy – and potentially creating a mammoth risk later down the line. New frontier Investors are always on the lookout for new credits. But boundaries really would be pushed if the Kurdistan Regional Government entered the capital markets. Officials from the government were in London last week, tentatively exploring their options with fixed-income accounts. EM investors are used to analysing opportunities from frontier markets, but even by these standards the KRG is one credit that will require extensive due diligence. While the government potentially sits on a quarter of Iraq’s oil reserves, its fight against Islamic State militants and the fragility of its relations with the Baghdad government mean several questions need answering before investors are likely to stump up funds. Indeed, investors are even unclear if Kurdistan, a semi-autonomous region in Iraq, can raise funds without the Iraqi government’s say so – and, if it can, whether it can service that debt without approval from the central bank. The fiendishly complex political situation obscures a potentially attractive economic story. But it will require an investor with nerves of steel to look beyond the obvious risks. Timing it right Eleven years ago, Hutchison Whampoa sold US$5bn of bonds in one go, setting a record for Asia’s biggest bond issue that would remain untouched for a decade. At the time, the US Fed Funds rate was at 1.00%, a record low, and US Treasuries were coming to the end of a particularly volatile year, having endured a sharp sell-off over the summer. Hutch launched it

In a quieter-than-normal corporate market, better known issuers capitalised on added scarcity last week to secure bumper books on their no-grow deals. One of those was French property investment group Klepierre (A– by S&P, negative watch), which locked in a four-times subscribed book for a €500m 10-year deal. Investors rushed in to Tuesday’s only deal when leads began marketing at initial price thoughts of mid-swaps plus 80bp–85bp. The final spread was fixed at just 72bp over shortly after on a €2bn book. A lead said managers had short windows for execution last week in light of changeable market conditions and the corporate earnings period still being in full swing.  “You have to pick your markets well, but we had a good day for issuance. The borrower had planned to come in on Tuesday, so it worked very well.” He added that they lost around €200m–€300m from accounts when guidance was tightened, however.   Active books were CA-CIB, RBS and Societe Generale, while passives were Barclays, BNP Paribas, JP Morgan, Natixis and UBS. Some of the comparables used by leads included Klepierre’s 2.75% September 2019s, bid at mid-swaps plus 53bp, its 4.75% March 2021s at 54bp, and Unibail’s February 2.5% 2024s at 52bp. All those were pre-announcement levels.  The lead put fair value at mid-swaps plus 68bp, leaving a 4bp new-issue premium. However, despite the initial demand for the credit, the paper did not perform well in the secondary market, and had widened 4bp to a bid of mid-swaps plus 76bp on Tradeweb towards the end of the week. In terms of regions, France took the biggest chunk at 43%, followed by the UK and Ireland with 16%, Germany and Austria 15%, Benelux 9%, Southern Europe 8%, Switzerland 5% and others 3%. In terms of account type, fund managers were allocated the lion’s share at 76%, insurers and pension funds 11%, banks and private banks 9% and others 4%.     The funds will be used by Klepierre to extend the maturity of its debt. The company on Tuesday also announced a tender offer for its €689m 4.25% March 2016 and €850m 4% April 2017 deals. The offer expires on November 3 with indicative results expected to be announced the next day.

Primary activity in the US ABS market was muted last week, with just two small deals totalling US$575m crossing the finish line by Friday afternoon. Both trades were under US$350m, barely inching up year-to-date issuance to US$175.904bn, according to IFR data. The slowdown in activity could partly be attributed to Bayerische Landesbank’s massive €6.5bn auction of mostly pre-crash RMBS out for bid, one banker said. “It sort of sucked the wind out of the market”. Investors looking for a rare stab at those legacy assets took focus away from the primary market, he said. One of the deals that did price was a US$325m 3.28-year timeshare ABS deal from Wyndham Vacation Ownership called SRFC 2014-3. Although the trade landed within guidance, it followed a recent risk-off trend to price wider than the previous offering. Wyndham’s US$255.23m Single A rated class cleared at swaps plus 115bp, while its US$69.77m Triple B rated B class went for 165bp. Those levels were 20bp and 35bp wide of the issuer’s last print in July, according to IFR data. Joint leads were RBS (structurer), Credit Suisse and Deutsche Bank. The Wyndham deal is backed by 19,342 loans with an average loan balance of about US$19,000 and coupon of 13.52%. Weighted average FICO scores were 716. The second deal was a US$250m dealer floorplan auto ABS from Navistar Financial Corporation. NAVMT 2014-1 included a US$211.33m 1.97-year Triple A note that priced at one-month Libor plus 75bp, from guidance of 75bp–80bp. BofA Merrill (structuring) and Credit Suisse led the deal. Despite a slow week, fresh US ABS supply is still outpacing deal volume for this time last year of US$165.228bn, according to SDC. Excluding self-funded issuance, volume is US$159.588bn compared with US$145.76bn last year, as of Friday afternoon. And some new ABS is on the cards for this week. The State of Hawaii is planning a Triple A rated US$150m green-energy rate reduction securitisation called HGEMS 2014-A. The novel bond is backed by green infrastructure property loans to underserved (low income or minority) homeowners, renters and non-profit organisations in Hawaii, according to a Moody’s Investors Service pre-sale report. Goldman Sachs is the sole lead and bookrunner on the two-tranche utility cost recovery charge (UCRC) securitisation, while Citigroup is a co-manager. NextGear Capital, another new issuer, will be looking to make its ABS debut with a US$352m dealer floorplan auto bond called NFMOT 2014-1. RBC (structuring) and Citi will lead the 144A two-tranche trade, which is expected to be rated AAA to A2/A by Moody’s Investors Service and DBRS. BNP Paribas is also marketing Bank of the West’s first prime auto ABS. Bank of the West has been originating auto loans for more than 50 years.

Syndicate officials are expecting a busy week ahead in the high-grade corporate market, with heavy volumes in the earlier part of the week. One of the deals expected next week could come from unrated corporate DNA, which hit the road last Wednesday. The Finnish telecommunications company mandated Danske Bank and Pohjola Markets to arrange meetings. An investor update call was held and a euro deal is expected to follow.It will be DNA’s second bond transaction. The company last tapped the European market in November 2013 with a €100m five-year 2.625% deal.    Meanwhile, investors might also get some hybrid action in the week ahead, after TDC recently completed its $2.2bn acquisition of Get in Norway. Some market players expect the issuance of hybrid and senior bonds to come next week, while MUFG says the pricing could be attractive, particularly as deleveraging is likely in the next two years following the acquisition. TDC is rated Baa3/BBB negative. Meanwhile, Molnlycke Holding, rated BBB with stable outlook by S&P, has mandated Barclays, BNP Paribas, Nordea and SEB to arrange European investor meetings on November 3 for a potential euro-denominated Reg S senior unsecured deal. Sweden-headquartered Molnlycke is a provider of single-use surgical and wound-care products.

A stronger market backdrop on Tuesday paved the way for some of the better-known corporate issuers to tap the European markets, including Swiss multinational food and beverage company Nestle.The Aa2/AA rated issuer came out with a €500m no-grow seven-year deal to secure the tightest print for a corporate in that maturity, according to leads on the deal. The banker said that in light of recent volatility, investors are continuing to pile into high-quality credits. “We had a clear window with not many issuers to contend with this week, so we were confident we could get a good result, especially as we know the credit is well received,” said the banker. Price talk started at MS+20/+25bp, before guidance moved to 15bp area (+/–2bp, to price in range) off a book of over €2bn. Final terms were set at 13bp, some 12bp inside the wide end of IPTs. Leads on the deal Deutsche Bank, HSBC, JP Morgan and RBS used Nestle’s outstanding May 2020 1.25% paper bid at MS+5bp, its September 2021 2.125% at 9bp, and its September 2022 1.75% at 12bp (all pre-announcement levels) as reference points.   One investor involved in the deal said demand seemed strong and reckoned pricing was reasonable and in line with market thoughts. Meanwhile, a banker away from the deal said that leads had been resilient on tightening spreads, due to the company’s established Swiss investor base “who want to buy the name regardless”. “The demand on a low-yielding deal is an indication of how willing investors are to buy this,” the banker said. Nestle’s last euro deal was in September 2013, a €500m 2021 trade at MS+20bp. That deal is bid at MS+10bp on Tradeweb today. In terms of region, France took 27%, Germany 21%, UK 14%, Netherlands, 10%, Switzerland 9%, Italy 4%, other 15%. By accounts, fund managers were allocated 79%, banks 7%, insurance and pension funds 6%, and other 8%.

US telecoms giant AT&T has demonstrated the potential for Taiwan’s Formosa market to become a main port of call for US companies increasingly needing to diversify away from their investor base at home, by issuing a record-sized US$1.295bn offering targeted at the island’s insurance sector. The 4.7% 30-year non-call two SEC-registered bond, which is denominated in US dollars but listed on Taiwan’s GreTai market, is the biggest Formosa deal since Taiwan’s authorities changed rules in April to supplement its domestic bond market with dollar issuance from foreigners. AT&T’s move follows Verizon Communications’ icebreaker in September, when it became the first non-financial from the US to tap the market. It issued US$870m of 4.8% 30 non-call one-year notes. Together, the two telecoms companies have shown that the Formosa market is not only easy to tap, with corporates able to issue off their SEC-registered shelves, but that it is also worth considering because of its depth. “The size factor is important, because high-quality US corporates with large funding needs know they can do massive deals in the US market, so they won’t get out of bed for less than US$750m usually,” said one banker. The Formosa market is also a true diversification of the investor base. Taiwanese insurers do not have a huge presence in the US’s corporate bond market because they are limited in the amount of offshore investing they can do. “This is a true diversification of the investor base for a US corporate, because Taiwanese insurance companies don’t tend to participate in the US domestic bond market,” said one banker. Taiwanese insurance companies, however, are very specific about what they will take. “You need to be highly rated – at least A minus by one of the major ratings agencies, and you need to hit their yield bogeys,” the banker said. The two telecoms companies each achieved attractive pricing in spread terms versus outstandings in the US, in part because Formosa investors are more coupon than spread-focused. The deals can also be structured flexibly for the issuer, given the short-dated calls. Need to diversify For both issuers, the appearance of the Formosa market has come at an opportune time. “Both AT&T and Verizon are wise to diversify their sources of debt capital, to reduce the risk of relying on a single market,” said Mark Stodden, a senior telecoms analyst at Moody’s. “AT&T has a larger need than Verizon at this point and it makes sense for them to establish new investor bases at this time. Over the next 12–18 months we estimated that M&A, spectrum purchases and general refinancing needs AT&T will alone probably need as much as US$25bn.” Many companies in the telecoms and pharmaceuticals space appear to be prime candidates for Formosa deals, given the M&A needs and the pumped-up shareholder capital return programmes in those sectors. Analysts say as much as US$70bn of new bond supply is expected out of the pharma/healthcare sector alone in the next six months. Although the US market has the capacity to absorb a deluge of paper, large US companies are mindful of keeping the pressure off US investors, especially when the investor base is dominated by behemoths such as BlackRock and PIMCO. “It’s extremely important [to diversify investor bases] because in dollars you are dealing with two of the largest [asset managers] in the world, so you don’t want to be too reliant on them and one market.” US banks Morgan Stanley Credit Suisse and Goldman Sachs have tested the new market with deals of their own this year. Morgan Stanley, however, has been the quickest off the mark, having led both AT&T and Verizon’s trades. Foreign issuers have sold more than US$12bn of US dollar Formosa bonds this year, already the most on record, and bankers expect total issuance to stand at as much as US$15bn–$20bn at the end of this year. Domestic competition But US companies will be competing with local banks for the Taiwanese insurance

Non-performing consumer debt investor Portfolio Recovery Associates has agreed a US$500m five-year loan that will be used to refinance existing debt at Norwegian company Aktiv Kapital, which PRA Group acquired in July. The multicurrency revolving credit facility, which is for Luxembourg-registered SHCO 54, will also be used to finance approved loan portfolios and for general corporate purposes. DNB Bank is mandated lead arranger and bookrunner on the financing, which may be increased by US$250m during the first four years. Pricing depends on estimated remaining collections for total loan portfolios. For an ERC ratio equal or above 20%, the financing pays 300bp over the applicable base rate, and for an ERC of below 20% the financing pays 250bp. PRA Group’s US$880m acquisition of Aktiv Kapital was financed through a combination of cash, a US$170m seller financing, US$435m from PRA’s existing revolving credit facility, and by raising an extra US$214m from the credit facility through an accordion feature. The acquisition also saw PRA Group assume around US$435m of Aktiv’s corporate debt, giving the transaction a total enterprise value of US$1.3bn. Aktiv Kapital loans being refinanced include a term loan from 2011, a NKr1bn revolver from May 2012 and a NKr350m bridge loan from DNB Bank agreed in June 2014.

US drug retailer Walgreens could come to the market in the early part of this week with a jumbo triple-tranche multi-currency deal, according to market sources.   The deal will finance the company’s US$15.3bn (including equity and debt) acquisition of the remaining 55% equity of Alliance Boots, having completed the initial 45% investment in 2012.     The size of the issue has yet to be decided, according to the source, although out of commercial paper, loans and bonds, it is expected that the latter will be used to finance the majority of the acquisition. “The debt they issue will be enough to fund the acquisition (contributing to the cash portion), to take out the Alliance Boots debt and to give the combined entity post-merger the right amount of liquidity,” the source said. The company is said to be looking at euros and sterling, and likely US dollars too, the source added. An investor eyeing the deal said that Walgreens is hoping to tap different markets with a multi-currency and tenor approach, in order to mitigate the impact of supply and secure the best possible terms. And especially because the sterling market is not that deep, he added. Price discovery, the investor said, could be problematic however as there are no clear comparables to point to, although he is using US-based CVS Pharmacy’s (Baa1/BBB+) bonds as markers. CVS’s most recent deal priced last December is a US$750m 5.3% 2043 deal. That priced at 145bp over US Treasuries and is on Eikon at Treasuries plus 131bp bid on Friday, equivalent to around swaps plus 135bp.      “Due to the Walgreens rating (Baa2/BBB stable) I will be looking at mid to high-triple B comps in the pharma, drugs and retail sector and adjusting pricing for the pretty high leverage metrics for a Triple B range,” the investor said. The source added that the acquisition will see Walgreens take on all of Alliance Boots’ debt, which is in both sterling and euros. “It makes sense that the debt raised will be spread across all three currencies, as even though Alliance’s debt is mainly in euros and sterling, Walgreens is a dollar company, so it’s not a ridiculous guess to say that a US dollar tranche could be there.” After finishing its roadshow last Friday, the company is expected to come any time from Tuesday, after the completion of paperwork on Monday. The roadshow started on October 29 and wrapped up two days later via Bank of America Merrill Lynch, Deutsche Bank and Goldman Sachs. Walgreens’ outstanding bonds have widened in the secondary market. Its US$500m 4.4% Sept 2042 deal is quoted at 165bp over Treasuries, having been around 130bp over at the beginning of July. This is due, according to one investor, to the expected fresh volume of supply on its way.

Braskem launched a US$750m revolver to general syndication via lead banks Citigroup, Credit Agricole, ING, JP Morgan and Standard Chartered. The deal previously launched to mandated lead arrangers, offering tickets of US$75m at 75bp. Intesa, SG and Sumitomo Mitsui joined as mandated lead arrangers. The five-year revolver pays 160bp over Libor. It is offering 60bp for tickets of US$50m at the lead arranger level, 50bp for tickets of US$35m as managers, and 40bp for tickets of US$20m as participants. Funds will be used for trade financing.

With market sentiment looking up, leads on Friday’s deal from Dutch multinational Akzo Nobel jumped in to secure a good result, ahead of this week’s expected rush.“Things have been slowly improving over the last two weeks, and even though we’ve had a choppy few days, it has started to level out. Today felt like a good opportunity,” a lead said on Friday. The banker attributed the issuer’s success to its rare name, allowing it to lock in a strong order book and a tight price, leaving a negative 2bp premium. “It’s not traditional to bring deals to the market on a Friday, but we thought we’d take the chance before the heavy volume weighs on investor demand next week. It’s going to be a busy one in the European corporate space,” the banker said. The global paints and coatings company, rated Baa1/BBB+ neg/stb, came with a €500m no-grow 10-year Reg S deal. Books opened at mid-swaps plus 85bp–90bp, before the spread was fixed 12bp through the tight end of IPTs, at 73bp, on books of €3.2bn (pre-reconciliation). Bank of America Merrill Lynch, JP Morgan and Mizuho were bookrunners on the deal. In terms of comparables, they referenced Akzo’s most recent outstanding bonds, including its €800m December 2018s, bid at mid-swaps plus 43bp, and its €750m July 2022s, bid at 64bp over, both pre-announcement levels. Another lead put fair value at mid-swaps plus 75bp, leaving a new-issue premium of negative 2bp. In terms of accounts, fund managers were allocated 72% and insurance and pension funds 19%, while 6% went to banks and private banks and 3% to central banks.By region, 28% went to France, 28% to Germany and Austria, 16% to the UK, 11% to Southern Europe, 8% to the Netherlands, 4% to the Nordics, 3% to Switzerland and 2% to others.