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said on a call.
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MOSTûACTIVELYûTRADEDûLASTûWEEK ûRALLYINGû
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over the sector.
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TIGHTER ûANDû&ORDû-OTORûISûTIGHTERûINûSYMPATHY vû
a DCM head told IFR. “But the sector has been
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banker said
GM’s lending unit helped drive positive
RESULTS ûWITHûREVENUESûOFû53BNûSOûFARû
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earnings presentation.
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unit.
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Lloyds and Mizuho were active bookrunners
on the trade.XEROX JUNK THREAT WORSENSPressure is mounting on XEROXûASû-OODYSû
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on review for downgrade on concerns about
THEûCOMPANYSûABILITYûTOûSTABILISEûANDûGROWû
its revenue base after an extended period of
sustained declines and intense competition.
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two months.
&ITCHûALREADYûDOWNGRADEDû8EROXûTOû"" ûINûLittle love left for Triple Bs
CORPORATES Sentiment shift sends spreads spirallingAfter years of being welcomed to the market by
yield-hungry investors, Triple B rated companies
are at risk of becoming neglected by a risk-
averse buyside.
ZF FRIEDRICHSHAFEN (Baa3/BBB) said on Friday
it had decided to postpone its deal, citing market
conditions.
The German car parts maker held investor
meetings last week for a potential two-part
benchmark euro, set to comprise a three-year
and a six to eight-year tranche.
Some of ZF’s bonds had widened by up
to 40bp since the mandate was announced,
according to Refinitiv data.
The shift in tone is relatively new. Last year,
investors were snapping up each and every bond
that came to market, flush with more cash than
they knew what to do with.
But factors such as Brexit, Italy and, more
importantly, the upcoming end of QE, mean that
risk appetite has waned, with investors migrating
to safer credits.
“Triple B paper is unloved at the moment and
has widened significantly,” one investor, who has
moved out of the bucket, told IFR.
He said investors have sold Triple B paper
in the fear that spreads may widen when the
ECB wraps up its Corporate Sector Purchase
Programme, which is due to end in December.
“The question is how wide the sector goes
before investors pile back into it.”
The spread differential between Single As and
Triple Bs had moved from 28bp at the start of
the year to 51bp last week - less than 1bp away
from the wide of the year, according to iBoxx
data.
With a pipeline brimming with Triple B issuers,
such companies are starting to have to pay
higher new issue premiums to get their deals
over the line.SETTING THE TONE
While ZF decided not to proceed, it does not
mean issuers do not have access. ATOS, rated
BBB+ by S&P, managed to get a deal away,
although it had to offer 40bp-65bp premiums at
IPTs to avoid the pitfalls of a rocky market.
The pricing tactic worked. Books were over
€4.9bn at launch for the €1.8bn three-tranche
trade and leads tightened spreads by up to
20bp from initial levels, meaning Atos ended up
paying 25bp-45bp across tranches.
By way of contrast, Procter & Gamble, Aa3/
AA-, paid a mere 5bp on a €2.1bn three-parter
on October 24.
“They’re hefty concessions, but Atos has size to
achieve, and it’s an M&A-related bond that they
have to get done,” said a syndicate banker away.
“They’re taking a longer-term pragmatic view.”
Proceeds will help the French IT services
company refinance the US$3.8bn-equivalent of
loans backing its US$3.4bn acquisition of US-
based information technology firm Syntel.
The deal, Atos’s rated debut in the European
investment-grade market, was split between a
€700m 3.5-year, €750m 6.5-year and €350m
10-year.
Atos’s generous approach came after US
chemicals company CELANESE (Baa3/BBB-) only
managed to move the pricing needle by 5bp
from IPTs of 150bp area over swaps for a €500m
long eight-year.
Concessions are likely to remain elevated
for Triple B borrowers in the near term, the
syndicate banker said.
“There is no immediate catalyst for
concessions moving down - especially because
the pipeline is skewed towards Triple Bs.”
Higher-rated borrowers are sitting on the
sidelines while the market looks volatile.
Potential borrowers include Grenke, Tele2 andIntercontinental Hotels, all of which carry ratings
within the Triple B bracket and may have to be more
cautious about their approach to pricing, bankers say.
“It’s clear investors are being relatively price
sensitive,” a second syndicate banker said. “It is
not the market for people who are looking for
opportunistic funding.”
The issuers in the pipeline are to some extent
idiosyncratic and so should not be taken as a
direct reflection of investor appetite overall, a
third syndicate banker said.
“Each has its own story and peculiarity, and
there’ll be a price to get them done,” he said.
“I want to see where a credit like Saint-Gobain
or Telefonica comes.”MARKET FEARS
Fears about the end of the cycle and a poor earnings
season have generated what BAML analysts call an
exodus out of corporate bonds towards safer ground
such as government debt and money markets.
High-grade funds recorded their eleventh
week of outflows in a row last week, according to
BAML analysts.
One problem at present is that Triple B credits
are skewed towards cyclical sectors that investors
are avoiding, such as autos, a DCM banker said.
Triple B companies have printed just under
€125bn in the European corporate market this
year, according to IFR data, out of a total €197bn.
Those golden times could soon be over.
“The psychology of the market has turned,” a
third syndicate banker said.
Despite the volatility, bankers do not feel as if there
will be a problem getting any of the deals done.
“There’s a difference between pricing impact
and an execution risk impact,” the second syndicate
banker said. “For me, it’s more a pricing discussion
than a ‘don’t want to buy anything’ discussion.”
Eleanor Duncan