National Express shifts up a gear with first hybrid

4 min read
Ed Clark

National Express brought the sterling subordinated market to life on Thursday with a debut hybrid bond with investors piling into the higher yielding instrument by the coachload, making for a deal eight times subscribed.

The pandemic-battered transport company began marketing its £500m PNC5.25s at a yield of 5% area, having met with investors during Tuesday and Wednesday, but as orders built to over £4bn leads were able to dramatically revise the pricing down to 4.25%.

“Regardless of the currency, the attraction [of hybrids] is the same. The yield environment is such that leveraging the capital structure to get that additional yield makes sense for a lot of investors,” said a banker.

National Express made the decision to introduce hybrid debt into its capital structure as a direct result of the impact of Covid-19 on its business and an ambition to protect its investment-grade credit ratings, explained a second banker.

The company is rated Baa2/BBB at the senior level and the new bonds will be rated Ba1/BB+ and awarded 50% equity credit by Moody’s and Fitch.

During the first UK lockdown, passenger numbers dropped by 80%, according to results published for the six months up to June 30, leading to a near 23% decline in revenues, excluding one off costs, compared to the same period the previous year.

And while initially the company shored up its finances with short-term liquidity through credit facilities and a reduction in capital expenditure, the impact of the pandemic was longer and more severe than initially predicted, calling for more equity-like support.

Investors may be comforted by the fact that a large proportion of the company’s revenues are not dependent on passenger numbers. More than 60% of contracted and concession revenues are not linked to passenger demand, wrote Moody’s.

Proceeds from the bonds will be used for general corporate purposes and the repayment of debt. Moody’s notes that the money will help boost the company’s liquidity ahead of £450m of redemptions in 2021.

Sterling hybrid bonds are not a common occurrence and Thursday’s deal marks only the third of 2020. BP issued the first in June, raising £1.25bn from the market, and was followed by SSE later that month with its own £600m deal.

The performance of recently issued sterling hybrids and the implication this has had for the cost of issuing new subordinated bonds in the currency has helped increase its allure to new issuers such as National Express, explained the second banker.

BP’s £1.25bn 4.25% PNC7 now yields just 3.22% and SSE’s £600m 3.74% PNC5.75 is bid at a yield of 2.87%, according to Tradeweb.

Fair value for the new issue was hard to estimate given its inaugural nature, said bankers. But for price points, leads used National Express’s senior bonds, a £400m 2.5% November 2023 yielding 1.51% and a £250m 2.375% November 2028 at 2.45%, as well as other hybrid sterling bonds.

These included £400m 4.75% PNC2024s from Aroundtown and £500m 4.875% 2078NC2025s issued by Vodafone, yielding 4.09% and 3% respectively. Those two issuers have senior/subordinated spreads of 260bp and 220bp.


With Engie returning to the euro market with a green hybrid on Thursday, the recent flurry of corporate ESG financing deals is leaving no part of the corporate primary market untouched this week.

During the morning, several bankers said that the PNC8 should work well, catering both to investor demand for yield as well as providing green assets for those buyers with a particular focus on them.

They were proved correct. The bonds hit screens at IPTs of 2.125-2.25%, but this was squeezed down to 1.55%, well through fair value by some estimates, as orders mounted to over €3.4bn for an €850m transaction.

For ESG investors in particular, green hybrids are highly attractive given the relatively limited universe of bonds that they have available to them and the fewer opportunities they have to pick up yield.

The deal was being run alongside a tender offer for euro hybrids due to be called in July 2021, January 2023 and June 2024, helping muster extra demand for the new deal, said bankers.

Engie’s senior bonds are rated Baa1/BBB+/A while at hybrid level they receive Baa3/BBB-/BBB+ ratings.