Jean-Baptiste Pons, EADS head of corporate finance and treasury
It is unusual to issue bonds in August, when many investors are on holiday. However, when European aerospace corporation EADS issued paper worth €1bn last month, common logic was defied in style. Writer Edward Russell-Walling
If there was a night school for bond origination, it would warn students never to issue in August. But it might also tell them that all rules are made to be broken. The European Aeronautic Defence and Space Company (EADS) broke the rules this August with spectacularly successful results.
The Airbus manufacturer is a rare visitor to the bond markets - until now, at any rate, although this may change. Since it was formed by the merger of its component national champions in 2000, it has issued bonds on only two occasions, both in 2003. One issue raised €1bn, maturing in 2010, and the second - in 15-year paper - raised €500m.
This is because EADS is invariably cash rich - at the end of H1 2009 it had net cash of €8bn. And that, in turn, is because its business model turns on advance payments from both commercial and defence customers, forming the cornerstone of its funding policy.
"Ours is a very cyclical industry, which is one reason why we maintain a high level of liquidity," says Jean-Baptiste Pons, EADS head of corporate finance and treasury. The group has a €3bn banking facility which expires in 2012, and makes occasional forays into the commercial paper markets. It also receives funding for specific projects from interested governments and the European Investment Bank.
Payback time
Back in the spring, however, EADS's bosses focused on the impending repayment of its 2010 bond, due next March. So in April they set out on a non-deal roadshow, passing through Munich, Frankfurt, Paris and London, to update investors with the EADS credit. "We had positive feedback," says Mr Pons. "There was very clearly a big difference between then and 2003 - when it was not easy to issue - and investors felt our sector was more acceptable than in the past. So sector recognition was strong, and there was very strong support for EADS specifically."
The EADS case was helped by the fact that some of its competitors, such as Boeing and Finmeccanica, were issuing actively in euros or US dollars. Greatly encouraged, EADS waited for an opportunity to present itself. Surprisingly, for those who regard the summer holidays as an infertile wasteland, it chose to move in the first week of August.
"Our thinking was very simple," says Mr Pons. "Interest levels are historically very low, and we like that. And in terms of credit, it was a very strong market, with very strong real money demand. So that was something that we decided to take advantage of."
He admits that it wasn't an easy decision. And that is why joint bookrunners BNP Paribas, Calyon and Deutsche Bank took the precaution - unusual in the current climate - of announcing on the afternoon before the books were opened that a benchmark deal of intermediate maturity was in the offing. "We wanted to give an extra chance to those mid-sized accounts who were not at their desks because of the summer holidays," Mr Pons elaborates.
Strong demand
The beach didn't seem to pose much of an obstacle because, within 30 minutes of opening the order books, the bookrunners had more than €9bn of demand from more than 400 accounts. Only a small proportion of those were limit orders, according to Mr Pons.
EADS wanted €1bn for refinancing purposes and that was what it printed, in seven-year paper, with no temptation to grow the size. The coupon was 4.625% and pricing, which had been whispered at 160 basis points (bps) over mid-swaps before hardening to a range of 145bps to 155bps, was set at 145bps.
Demand was particularly strong out of Germany. "In 2003, French accounts were in the majority," Mr Pons recalls. "But this showed how strong the German market is for corporate credit."
The bond tightened significantly in secondary trading, but Mr Pons believes that reveals more about the general strength in the market than about the pricing and says that, if he had to do it again, he would do it - and price it - the same way.
He also suggests that EADS may become a more frequent sight in the markets. "A company like EADS must be present in the debt capital markets, and one target of this deal was to be present with a benchmark transaction," he says.
"In future we want to have a clearly visible curve, and we can only do that if we are in the market more regularly than in the past," he adds.
