MTU prints €500m 2027 paper for buyback of 2023 CBs

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EMEA

Following a record negative yield issue from France’s Edenred last week, Germany’s MTU Aero Engines printed a 7.5-year convertible bond (maturing in March 2027) that came with just a sliver of a coupon and a very high premium.

Proceeds from the €500m paper will go towards buying back 2023 CBs that were issued in 2016 with a coupon of 0.125% and are massively in the money with shares trading at near double the conversion price.

This is the third CB from MTU, which is rated Baa3 by Moody’s and BBB by Fitch, and along with being investment grade, the benchmark sizing and the familiarity of the name meant pre-sounding was unnecessary.

A credit assumption of 100bp was derived in part from a peer group of German industrials that have issued vanilla bonds in euros such as HeidelbergCement, Hochtief, Fresenius and Deutsche Lufthansa. There was no pushback, with stock borrow available at 35bp.

Implied vol on that basis was 21.9%-29.3%, which compares to historic over 180 days at 21.9%.

The new CBs were offered with a fixed coupon of 0.05% at 101.5%-104.5% for a yield-to-maturity of -0.54 to -0.15, and a premium of 50%-60%. The reference price will be the VWAP for Wednesday to Friday inclusive, so investors will know their allocation in both the new issue and tender before the VWAP period begins.

There is a call from April 2025, subject to a 130% trigger.

Books were covered by early morning and ended multiple times covered, with pricing at 103%, implying a -0.34% yield-to-maturity. The premium was at 55%, on top of a share price that has risen more than 62% this year to last week’s all-time high close of €253.40. The rise has helped the stock into the DAX, which it joins on September 23.

Shares took a slight hit on Tuesday, ending at €236.70 from Monday’s €248.20 close.

A banker involved said that restriking at a big premium to the current share price massively reduces dilution while pushing out the maturity. The outstanding bonds are callable next summer.

In a book of around 100 lines, allocations were split 45%/55% hedge to long-only accounts.

On pricing, implied vol was 25.6%, with a bond floor of 95.4% and delta of 35%. The new bonds were trading around 103.5% in the grey in the afternoon.

MTU is buying up to €275m of the €500m outstanding 2023s, offering €203,500-€204,250 per €100,000 of bonds, adjusted for the VWAP over September 11-13, plus accrued interest of €42.69 per bond. The outstanding bonds are heavily in the money, trading at 203.25% ahead of launch of the buyback. A Dutch auction process wraps up at 7am in Germany on Wednesday.

The banker said that the straight debt market is printing at record levels and it “feels like we are following in their wake”.

HSBC and UniCredit were bookrunners, with UniCredit the sole bank carried over from the previous CB issue in 2016 when Goldman Sachs was sole global coordinator, with Deutsche Bank and UniCredit as joint books.

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