Euro IG issuers achieve size through confidence-building trades

5 min read
EMEA

Two corporates were able to build sizable books in the euro investment-grade bond market on Monday, proving that the primary is constructive with good levels of liquidity despite elevated risks.

Volkswagen and Thames Water both brought dual-tranche offerings, for €2bn and €1.15bn, respectively. Both deals were subscribed almost three times at peak orders.

Volkswagen Financial Services (A3/BBB+) was in the market with three and six-year notes. The deal gained combined books of over €5.9bn at the peak with greater interest at the time for the three-year tranche, at more than €3.1bn. By launch though, combined books had fallen to just over €4.2bn with demand evenly split.

"It's a standard European name with a good following and rating, so I was waiting for this type of deal that sets a true barometer of where the market is, outside of the utilities and real estate sectors," said a syndicate banker.

"The market looks decent, especially given that the books were built without the ECB's PEPP participation."

Both tranches, which were equally-sized at €1bn, priced tight.

The finance subsidiary of Volkswagen set final terms at mid-swaps plus 38bp and 80bp via BNP Paribas, HSBC, Mizuho, Standard Chartered Bank and UniCredit.

The three-year came close to or even flat to fair value, according to bankers away from the deal, who put it in the mid to high-30s. On the six-year they reckoned fair value was in the mid to high-70s. One lead said the three-year note priced very close to fair value, while the longer tenor paid a premium of 6bp–7bp.

Keeping the tenors relatively short helped rein in the premium. The average concessions on 10-plus year maturities have risen to 13bp from the 7bp level seen in the first half of last year, according to ABN Amro's strategists.

"The company raised the maximum of what it wanted to achieve on a huge amount of demand, although there was some attrition after pricing tightened," said the lead.

Thames Water Utilities Finance also enjoyed a good response from investors, enabling it to upsize its green dual-tranche deal at €1.15bn. Initially it was seeking €1bn through two evenly split portions.

The UK water company launched a €575m six-year bond and a €575m 10-year tranche at mid-swaps plus 75bp and 100bp, respectively, inside IPTs of 95bp–100bp and 115bp–120bp.

One DCM banker put fair value in the mid 60s and 80s, leading to concessions of 10bp and 15bp.

Combined books peaked at €3.1bn with a skew to the six-year tranche. Orders then fell to €2.8bn with the same skew. BNP Paribas, Morgan Stanley, NatWest Markets and SEB were the leads.

"They have a solid business and there hasn't been much euro issuance," said a lead as he explained the demand for the new issue. Although a frequent issuer in sterling, the last time Thames Water tapped the euro market was in 2010, according to IFR data. The company said in an investor presentation that it plans to diversify its funding sources in the euro market.

The Class A secured notes are guaranteed by parent Thames Water Utilities and the intermediate holding company within the group, Thames Water Utilities Holdings.

Financing subsidiary Thames Water Utilities Finance is the issuer of the new bonds that have expected ratings of Baa1/BBB+ (Moody's/S&P), one notch higher than the parent's Baa2 rating by Moody's.

Raw sewage leak

Thames Water plans to use the proceeds of the new green bonds for projects under its sustainable financing framework, such as building sustainable drainage systems, while it is facing protests over sewage release into the Thames.

"It's unfortunate timing," said a DCM banker before the deal was launched. "This is a challenge for the sector in terms of PR - it's not that they are not allowed to do it. The news story is unhelpful but doesn't look like it will rock the execution."

Hundreds gathered in Oxford after the water company sent a late warning about a spill because of an IT failure. Releasing sewage into rivers is legal after certain weather events as it prevents properties from flooding, but the company says any discharge of untreated sewage into rivers is unacceptable and aims to get the discharges completely phased out by 2050, according to an investor presentation.

"Transparency is very important so although in the short-term, it's going to be quite uncomfortable for us on the additional interest and complaints we'll get, we are committed to issuing real-time notifications of any spill at any of our 468 permitted discharge points by the end of this year," said Richard Aylard, sustainability director at Thames Water Utilities during the investor presentation.