Fair value using Tradeweb bid prices on
April 2026s and January 2028s came out at
around plus 53bp, tallying with a lead
banker estimate. CreditSights analysts saw it
a touch wider at 55bp.
“Telefonica’s management remains
focused on deleveraging and though the
pace is slow, hampered by competition in its
domestic market, and bonds trade tight
after strong performance, we continue to
like Telefonica from a long-term
perspective,” the analysts said in a note.
The Spanish telecoms company, burdened
by the failed sale of its O2 UK business, has
been pursuing a strategy of cutting debt for
years. Net debt stood at €47.2bn at the end
of September, a 5% fall year-on-year.
Telefonica (Baa3/BBB/BBB, all stable) was
last in the market in late November with a
€1bn perpetual non-call 5.5-year hybrid at
2.627%. On Monday, the bond was quoted at
2.575%, according to Thomson Reuters data.
Banca IMI (B&D), Bank of America Merrill
Lynch, Barclays, CaixaBank, HSBC, Lloyds and
MUFG were joint lead managers.
THALES SHINES IN SECONDARY AS
PRIMARY GRINDS TO A HALTTHALES’ January 2025s, which priced at an
eye-watering 23bp over mid-swaps on
Tuesday, were further squeezed in the
secondary market on the back of low supply
and ongoing benign conditions.
On Friday, the paper was quoted at plus
13bp, 10bp tighter than reoffer, according
to Tradeweb. The French aerospace and
defence company, rated A2/A-, had
marketed the paper at mid-swaps plus 35bp-
40bp.
Active leads Barclays, HSBC and Natixis
pegged fair value at plus 23bp. Books
SETTLEDûAROUNDûõBNûATûTHEûlNALûTERMSû
ONûAûõMûSIZEû0ROCEEDSûWILLûRElNANCEû
AûõMûORIGINALûlVE
YEARûMATURINGûINû
March.
Recent trades also held up well in
secondary trading as the primary market
dried up. Gas Natural January 2028s were
4bp tighter at 63bp while Dwr Cymru March
2036s were at 75.5bp over Gilts from their
80bp reoffer level on Friday.However, Telefonica January 2027s,
which priced at 58bp over mid-swaps, were
trading 1.5bp wider.
Four investment-grade corporates borrowed
a total of €2.7bn-equivalent last week - a drop
of more than 60% compared with supply in
the same period last year, according to IFR
data. Year-to-date issuance is down almost
28%, at €18.8bn versus €26bn in 2017.
On Friday afternoon, the iTraxx Main was
BROADLYûmATûCOMPAREDûWITHûTHEûBEGINNINGûOFû
the week at around 44.6bp.
“Spreads are extremely constructive and
attractive for borrowers,” a banker said.
“The only thing lacking is that requirement
from borrowers to fund because of pre-
funding seen in November/December and
the beginning of the blackout period.
There’s nothing more sinister than that.”
Corporates issued €34.7bn in November
and December last year, almost €6bn more
than in 2016.
While bankers warn that there could be
an uptick in supply any time, most expect
DEALSûTOûSTARTûmOWINGûFROMûTHEûSECONDûHALFûOFû
February.welcome S&P flexibility on hybrid LMEs
CORPORATES Agency withdraws lower all-in financing cost requirementBankers are rubbing their hands following S&P’s
decision to allow refinancing of hybrids within
five years of issuance, a change that opens the
door to liability management exercises.
Previously, if issuers refinanced hybrids ahead
of a call, only the new issue would be given
equity credit. Being unable to perform an LME
meant a potential high cost of carry, and issuers
therefore tended to push refinancing as late as
possible.
However, S&P has now loosened its criteria to
allow for early refinancing. It has also withdrawn
a proposed requirement that replacements have
lower all-in costs than existing deals, which
had been seen as a hurdle to issuers’ ability to
conduct LMEs.
“For market participants, this takes a very
complex element out of the picture,” a hybrid
structuring banker said. “Otherwise, it would
have meant room for errors and interpretations.”
In its changes proposed at the end of last
year, S&P had said issuers needed to take
into account relative coupon costs and any
associated redemption premium. Issuers
typically have to pay a premium to incentivise
investors to part with their bonds.
The removal of the time constraint and cost
for refinancing falls under certain conditions,
however, including the need to replace the
instrument with an equivalent level of equity
credit.In addition, the replacement must not
materially weaken the issuer’s creditworthiness
and S&P must remain convinced about
management intent to retain hybrids in the
capital structure.
BNP Paribas analysts expect established
issuers with large hybrid programmes - such as
EDF, Engie, EnBW, Orange and Telefonica - to
consider LMEs.
“Clearly, older hybrids with high coupons are the
most obvious targets, however, these have already
significantly rallied since the original RFC [request
for comment] and high cash prices may act as
something of a deterrent, even though as S&P
points out, LMEs are driven by more considerations
other than just cost,” they wrote in a note.
EnBW’s 3.625% euro hybrid was trading at
112bp over mid-swaps on Friday, from 136bp
in late October when the RFC was announced.
EDF’s 4.25% deal was around 125bp, 17p tighter.NOT A GAME-CHANGER
While bankers see the added flexibility as a
positive move, they do not expect the revised
methodology to be a significant game-changer
in terms of net issuance or spreads.
“This might slightly disorient the expected
supply because longer call dates could be
accelerated,” a second hybrid structuring banker
said. “In terms of spreads, they are already very
squeezed at the moment. They may tighteninitially but they will eventually stabilise. It’s still
early days anyway.”
The iBoxx euro non-financials subordinated
index closed at 1.96% on Thursday, slightly down
from 1.98% on January 16 when the methodology
was published, and close to its all-time low.
Corporate hybrid supply in euros and sterling
has slowly been increasing in the past couple of
years, from €7.45bn in 2016 to €12.075bn in 2017,
but it is still far off the €26.5bn reached in 2015.
Citigroup analysts forecast €15bn of issuance
in 2018 as a result of this year’s €13bn call
schedule being considerably busier than last
year’s €4.6bn.
“Assuming, as we have in our base case, that
these S&Pchanges are introduced, this should help
to drive up refinancing of existing hybrids, though
the impact on net issuance is far more uncertain,”
the analysts wrote in a note earlier this year.
The second banker reckoned the revised
methodology might attract new entrants to the
market.
However, issuers’ ability to attain high equity
content from hybrids is limited under the new
criteria. The only instruments now eligible for
high equity content are certain mandatory
convertibles and government-owned hybrids.
“S&P has narrowed the option value for
issuers, which we see as a mild negative,” the
banker said.
Pauline Renaud