IFR International - 20.10.2018

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Checkout queues for Tesco

comeback

„ HIGH-YIELD/CORPORATES Upgrade to IG sees investors keen to buy

Cautious execution on TESCO’s bond comeback

paid off, with the issuer pricing its first issue after

four years on books subscribed nearly six times.

The UK retailer priced a €750m senior

unsecured five-year at 110bp over mid-swaps,

with books over €4.4bn (pre-reconciliation).

The deal hit screens after investor meetings

on Monday and Tuesday in the wake of a one-

notch upgrade from Fitch the previous week that

returned the company to an investment-grade

rating after it was junked in 2015. Elsewhere,

it remains on the high-yield side of the ratings

divide: Moody’s rates Tesco Ba1 (positive), while

S&P has it at BB+ (stable).

Given recent volatility across financial markets,

a euro, five-year maturity was the cautious choice

by leads BNP Paribas, Citigroup, Goldman Sachs

and MUFG (B&D).

The proceeds will finance a tender offer on

outstanding bonds in euros, sterling and US

dollars.

Pricing tightened from 135bp-140bp IPTs set

earlier in the session, when the deal was initially

marketed as benchmark-sized. Participants

found the IPTs on offer generous, based on

Tesco’s outstanding curve, with an investor

spotting fair value around 95bp.

The final pricing made for a yield of 1.482%,

making Tesco one of the only issuers carrying

high-yield ratings to price inside 2% in 2018,

according to IFR data.

“The interest is very mixed; there are some

investors that are super-fixed to index restrictions

• if you’re that kind of guy, this is a high-yield
  bond – but it’s a high-yield bond with a very

low yield,” a banker on the deal said earlier in

marketing.

“It’s a bit difficult to say what the new-issue

premium is because there are so many different

ways to look at it,” the banker said, adding that

the concession paid would depend on accounts’

views, factoring in both Tesco’s curve and where

other crossover names are trading.

While several investors told IFR they focused

on Tesco’s outstanding curve, leads also sent

out comparables European retailers Carrefour

and Auchan, UK companies Informa, ITV and

G4S International, and crossover names such as

Beckton Dickinson and Nokia.

CreditSights analysts said the timing of the

liability management exercise was curious, given

that Tesco has a €750m bond maturing in less

than three weeks.

“Linking the new bond with a multiple

tender perhaps makes the point that Tesco

hasn’t stopped reducing its gross debt burden,”

CreditSights said.

The analysts said Tesco “used to be a defensive

way to play the UK consumer for euro investors,

and believing that Brexit newsflow might become

increasingly less promising based on its recent

deterioration, the company’s treasury might be

fearful that a week is a long time in politics”.

Investors expect to see Tesco back in the

market soon. One said he anticipated further

liability management exercises on upcoming

maturities, while another expected it would gain

another investment-grade rating by April, when

its full-year results are due.

Yoruk Bahceli, Eleanor Duncan