The tone shifted in the euro investment grade primary on Wednesday with investors showing a preference for higher-rated corporates issuing bonds in sought-after structures over those selling riskier securities or with crossover ratings.
Signs had already emerged of issuers finding primary markets tougher in other sectors of the bond market - a €500m 20-year covered bond from Austrian lender Raiffeisen-Landesbank Steiermark failed to budge from initial pricing on Tuesday, while in the SSA market a number of borrowers are adjusting to a big sell-off in bond and swap spreads over the past couple of weeks.
But the credit market had been carrying on serenely, with average spreads for euro investment-grade corporates hovering around pre-Covid 19 levels partly thanks to a big supply/demand imbalance.
On Wednesday, though, the market saw the first cracks after telecoms and satellite network provider SES was unable to budge pricing on a hybrid, even though bankers thought the initial levels were attractive. A crossover deal from another telecom Ericsson also felt a bit flat, although leads were able to tighten pricing. In contrast, Air Liquide stormed home with an inaugural green bond even though demand nearly halved from its peak.
The big talking point was the SES hybrid. The company, rated Baa2/BBB-, opened books on an expected €600m perpetual non-call 5.25 issue at 3% area annual yield.
Bankers away from the deal thought that was an attractive starting point. "At 3% IPTs that deal should really sell itself,” said one.
Those IPTs, for example, were 100bp more than ENI (Baa1/A-/A-) paid for a €1bn perpetual non-call six-year hybrid two weeks ago as part of a dual-tranche transaction. It also sold a a €1bn perpetual non-call nine-year at 2.8%.
The IPTs on SES also looked attractive on a senior/sub differential - the company has a €500m 1.625% March 2026 bond bid at 0.232%.
And yet with a book that only got to about €900m, leads had no choice but to stick to 3% at final terms, for a slightly upsized print of €625m.
A softening in the market tone in recent days meant that investors required a certain yield before they would engage, said a lead.
"The market has been a bit more volatile over the last few days and investors needed that bit more incentive to play," he said. "And with a 3% yield that is exactly what they got."
Some bankers suggested the fact that the instrument itself carries sub-investment ratings of Ba1/BB from Moody’s and S&P would not have helped.
“This kind of hybrid probably isn’t what the market is looking for at the moment,” said a second banker away.
JP Morgan and MUFG acted as global coordinators and structuring agents, along with bookrunners BNP Paribas, Goldman Sachs, HSBC and Mizuho.
Swedish telecom Ericsson (Ba1/BBB-/BBB-), meanwhile, issued its first euro bond in more than four years, resurrecting a deal that it marketed in early February but had to delay due to internal reasons.
Bankers said the €500m eight-year deal felt "okay-ish", although the issuer was able to revise pricing and the transaction was more than twice subscribed.
Marketing began at 125bp area over mid-swaps, through leads BNP Paribas, Citigroup, Deutsche Bank, Nordea, Santander and Standard Chartered.
“Investors had essentially been waiting for them to return and we got very good interest when the mandate was announced [on Tuesday],” said a DCM banker.
Books peaked at more than €1.5bn and the spread was set at 103bp, with orders falling away to over €1.2bn.
Fair value was highly subjective given how infrequently Ericsson issues. It has a single euro benchmark outstanding – a €500m 1.875% March 2024, which on Wednesday was bid at 53bp.
Ericsson had a €500m bond mature in March which it repaid with cash and proceeds for the new deal are earmarked for general corporate purposes.
Liquide green
Green financing continues to be at the forefront of European corporate supply with French industrial gas specialist Air Liquide (A3/A-) the latest to join the throng with its debut in the structure through a €500m no-grow 10-year note.
Bankers were keen to highlight that because of the niche nature of the business, the sustainable finance framework incorporated some novel features, which includes a biogas category that covers projects such as landfill gas capture.
Proceeds can also be used for projects that support the production, storage and distribution and use of hydrogen.
Investors were certainly keen to get their hands on the issue, with orders peaking at more than €3.1bn. That allowed leads BNP Paribas, Credit Agricole, HSBC, Natixis and Societe Generale to revise pricing to 28bp from IPTs of 60bp area.
Given the degree of tightening and with fair value seen in the mid 30s, final books fell to €1.7bn. Still, bankers said the quality of credit spoke for itself.
“These guys are a bit of a darling of the credit market,” said a second DCM banker. “People like them, they are rare and as a company they are pretty central to the supply of oxygen which in the context of the pandemic is very important.”
Finnish REIT Kojamo (Baa2) also issued its debut green transaction, tapping Danske Bank, Deutsche Bank, Nordea and Swedbank to deliver an upsized a €350m eight-year note.
The company was initially expecting to print a €300m deal, but a book of €1.4bn enabled it to increase.
The spread was set at 96.2bp, for a yield of 1%. Books had opened at 125bp area.