Edenred's €500m debut CB pays –1.5% yield

IFR 2299 7 September to 13 September 2019
5 min read
EMEA
Robert Venes

French employee benefits and payments company Edenred set a new low for yield in Europe’s primary market, breaking the record for negative yield set just weeks earlier.

There was no pre-sounding ahead of launch for the €500m deal despite the fact it was coming from a debut issuer and was the first convertible bond out of the traps in Europe following the August break.

Similarly the previous European structured equity deal, a €600m CB at the end of July for French electronic payments company Worldline, was not pre-sounded despite it being the issuer’s debut in the market.

Pre-sounding has been the norm on nearly all deals, bar well-known repeat issuers, for several years.

“There was no pre-sounding but Edenred is a good name, with a great equity story and a strong rating; it ticks all the boxes,” said a banker at one of the global coordinators. Another banker involved said that books had been covered by 9am in Paris and the deal wrapped up multiple times covered.

Edenred’s five-year bonds were offered with no coupon and use the standard French OCEANE structure, which allows for the delivery of new or treasury shares.

The deal is opportunistic and capitalises on the company’s elevated share price that reached a record close in August of €46.37. Shares closed at €44.07 on Monday and slipped less than 1% despite the new issue on Tuesday to remain up more than a third in 2019.

THROUGH ONE PERCENT

The CBs were priced with a massively negative coupon of –1.53%, trumping the previous record of –0.96% set by Worldline, though that was on seven-year paper. Investors in the straight debt market are seeing new records set on euro issues on a weekly basis and the structured equity market looks to be following the same path, though probably more sporadically.

The bonds were offered with an issue price of 105.5%–108% for a yield to maturity on guidance of –1.53% to –1.06% with a premium range of 35%–40%. Terms were set at the best ends for the issuer.

There are no clear peers for Edenred, but an S&P rating of BBB+ and outstanding straight bonds gave a clear credit assumption of 45bp. On that basis, implied vol was punchy at 22.5%–29% versus historic vol over 100 days at 22.6% and over 250 days at 25.2%.

Outstanding straight bonds have maturities of 2025, 2026 and 2027, making a five-year bond maturing in 2024 a good fit for the overall maturity profile.

There is a call at three years subject to a 130% trigger.

The reference price of €43.66 gives a conversion price of €61.13 at the 40% premium. The bond floor at issue was 100.4%. The bonds were bid at €66.30 on Thursday.

“It was definitely an opportunistic move to set the conversion price significantly above the all-time high,” said a third banker involved.

The book totalled more than 100 lines and included strong demand from hedge funds and long-only accounts, with the third banker noting the importance of the former in building momentum.

Proceeds will be used for general corporate purposes, including for financing external growth.

Edenred’s footprint in ECM has been relatively light in recent years, with just exits through accelerated bookbuilds by Eurazeo in 2013 and Colony Capital in 2017.

BNP Paribas and Societe Generale were global coordinators on the CB, and bookrunners with Credit Agricole, JP Morgan and HSBC.

WHY BOTHER?

Investors in straight debt have come to terms with new issues coming at negative yields, but equity-linked bankers do not think this has to be a problem for convertible issuance.

“When you see Engie pricing a straight bond at a negative yield, everything is possible in this environment,” the third banker said. Engie and Orange in August became the first European corporates to price bonds with tenors longer than five years at a negative yield.

“The difference between a bond holder and a convertible holder is that the latter can make money on the option component, the return can be positive as opposed to a bond holder who pays to get risk in his book.”

Will issuers bother to look into convertible terms if a negative yield is available from a straight bond? An early answer came in France’s Veolia Environnement replacing its 2021 CBs with €700m of six-year paper that yields –0.6% and Belgium’s GBL launching a €750m exchangeable into LafargeHolcim on Friday offering a yield of –0.75% to –0.30%.