French oil major Total decisively cashed in on record cheap funding in March to sell €5bn of subordinated debt, blazing the trail for one the bond market’s hottest trends of the year.
Total pre-empted any potential financing shortfalls from suffering oil prices and locked in the lowest-ever coupon for a corporate hybrid, despite it being under no pressure to raise capital or defend its balance sheet.
Lead-managed by Citigroup and Barclays as joint global coordinators and HSBC and Societe Generale as bookrunners, the deal also attracted the largest order book for a corporate hybrid transaction to-date.
The dual-tranche offer – rated Aa3/A by Moody’s/S&P – drew in a whopping €20bn of orders, with investors attributing demand to the deal’s unusually strong credit rating, speculating that a large portion of orders came from investors that have rarely bought hybrids before.
The €2.5bn perpetual non-call six-year tranche was priced at 2.25% and the €2.5bn perpetual non-call 10-year at 2.625%, with orders skewed towards the latter. The company had started marketing the deal earlier at 2.375% area and 2.75%–2.875%, respectively.
Support continued in the aftermarket, as the 2021 paper was bid at a cash price of 101.30 in the secondary market the day following pricing, while the 2025 was bid at 101.55.
The transaction became the first deal from an oil and gas major since BG issued a hybrid in June 2012 and paved the way for Repsol, Dong Energy and BHP Billiton to follow.
It also marked another step in the development of the once-niche funding instrument, which is normally the reserve of those defending their ratings without having to tap the equity markets.
Following Total’s hybrid debut in February, euro-denominated hybrid issuance reached €7.8bn in the following month of March, the highest ever monthly level, according to IFR data.
Hybrid issuance dropped off a cliff in May due to Greece-related volatility, while negative news from Volkswagen and Glencore in September kept the market from bouncing back as corporates wrapped their heads around increased funding costs.
Yields in the sector rose to 3.92% in September, from the year’s low of 2.67% in March – just weeks after Total issued its deal, according to the Bank of America Merrill Lynch global corporate hybrid index.
“Total’s timing was absolutely perfect; it knew what it wanted to do and it picked the most opportune window to do it in,” a lead banker on the deal said.
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