Euro IG companies are gaining in size

Bigger order books and smaller new-issue concessions were on the cards in the euro-investment grade corporate market on Wednesday.

Although there were only two issuers, and both had specific reasons for the level of support achieved, the results suggest that the market is starting to regain its confidence after several volatile sessions.

italian utility Terna has priced its first hybrid offering, a €1 billion uncall perpetual green bond, while US technology blue chip IBM printed an offer in two tranches of 2 billion euros with tenors of eight and 12 years. Hybrid and longer-dated bonds have become riskier funding instruments in recent weeks as investors played it safe as yields rose.

But as investors become accustomed to a higher rate environment and companies exit earnings reports, the primary market should start to become more active and issuers more strategic about their options.

“We are finally starting to see the primary market open up after the earnings blackout and rate volatility,” said James Vokins, head of investment grade credit at Aviva Investors.

He signaled there was no need “to jump into the first new deal” given that many are yet to come, but the general impression from Wednesday’s new issues was that investors were fond of both.

Books for Terna closed at 4.1 billion euros, while for IBM, peak orders reached 6.4 billion euros. Demand at the time of the allocations was over €5.65 billion.

A Terna official said: “It was a terrific deal given the volatile and weak market backdrop – this is not a typical market for launching hybrids.”

AT1s recently issued by banks have struggled to perform, while two hybrid notes sold by TotalEnergies in January are both trading below par. The average yield to maturity of corporate hybrids has risen 50bp year-to-date, according to iBoxx, to 2.24%, although secondary markets have been more stable over the past 48 hours.

“We’ve had almost daily calls over the past week, but yesterday we had the confidence to announce the deal after seeing stability in the secondary,” another senior banker said on the Terna trade. .

Terna’s top official also stressed that “investors appreciated the inaugural nature” of the deal and the utility’s “commitment” to maintaining a premium rating for hybrids. Terna is rated Baa2/BBB+/A– (Moody’s/S&P/Scope) at senior level, while ratings are expected to be rated Ba1/BBB–/BBB.

Prospects were able to increase the size to 1 billion euros from an expected target amount of 750 million euros and tighten prices to 2.45% from a starting point of 2.75% of zoned. The first lead estimated that there was a 170 basis point premium to Terna’s senior curve or represented a 15 basis point concession to Enel’s hybrid curve. BNP Paribas, Banca Akros, Bank of America, Citigroup, Credit Suisse, IMI-Intesa Sanpaolo, Mediobanca, Santander, Societe Generale, SMBC Nikko and UniCredit were the bookkeepers.

More hybrids are likely. “We were aware of a similar hybrid offering, so we didn’t want to compete with that one,” the second official said.

Terna’s hybrid is only the third of the year, following Total’s €1.75 billion two-tranche issue and a €350 million deal from Austria’s AT&S. By this point last year, the companies had issued 5.6 billion euros worth of hybrids.

“We are cautious about accumulating too much subordinated debt, especially for higher-quality funds. Hybrid payouts to seniors are still not as attractive,” Vokins said.

“The recovery in spreads should be around three times, or around 200-250 basis points. We are still trading at the narrow end of this range, so we have to be careful. hunting basis for yields (as seen in recent years), but we are now in mid to late cycle conditions and need to be careful of significant losses.”

Close to fair value

IBM (A3/A–, Moody’s/S&P) offered a senior offering consisting of a €1 billion eight-year bond and another €1 billion 12-year bond launched at medium swaps plus 57 bp and 77 bp, respectively. Initial price thoughts were an 80 bps zone and a 100 bps zone.

Leads put fair value at 53 bps and 73 bps. The concession of around 4 basis points on both tranches was well below the 10 to 15 basis points seen on recent issues, especially for those with durations longer than 10 years.

IBM, however, is one of the best known companies in the world. Last week, it beat fourth-quarter earnings forecasts. The deal was also a rare reverse Yankee for that year.

Only Prologis and Digital Realty had issued in euros in 2022, although the latter issued through a Dutch entity.

Barclays, Bank of America, Citigroup, HSBC, Mizuho and SMBC Nikko were the lead arrangers of IBM’s deal.

About William G.

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