BNP Paribas helps to kick-start 2016

The bond market endured a miserable start to 2016, with January dead and February not much better. However, things sparked into life with the record-breaking Anheuser-Busch InBev euro-denominated bond. Edward Russell-Walling speaks to the BNP Paribas team that helped bring the deal to fruition.

After a dismal start to the year, investment-grade corporate bond issuance has come back to life in Europe. As if to celebrate its resurrection, brewer Anheuser-Busch InBev (AB InBev) issued the largest ever euro-denominated bond, for which BNP Paribas, one of the leading lights in European corporate debt, acted as joint global co-ordinator.

This has been an unusual year in the debt capital markets, with record highs and, as first-quarter investment banking results have demonstrated, miserable lows. It started very badly. January is never a bumper month for corporate issuance because so many companies are in their close periods, but this year it was exceptionally quiet.

“A hellish month,” is how BNP Paribas head of European syndicate Rupert Lewis describes it. “It was the crystallisation of everything that had happened in the fourth quarter of 2015, including China, oil prices and general economic woes,” he says. “That made for a uniquely unconstructive backdrop for corporate issuance.”

January blues

The numbers bore that out. Euro-denominated issuance in January 2015 was €17.8bn, compared with €21.9bn for the same period in 2014, according to Dealogic. The monthly total for 2016 was a mere €6.4bn, and more than half of that was from one issuer, Daimler, which reopened the market with a €3.75bn deal on the second business day of the year.

Daimler did well to get in early, because it was all the way downhill for the rest of the month. Yet until relatively recently, corporate issuers had it all their own way, with a strong credit market at their disposal, particularly if they had an investment-grade rating.

That all came to an end in mid-2015 as the biggest corporate issuer in Europe, Volkswagen, was caught in an emissions scandal and the European Central Bank (ECB) suspended purchases of its asset-backed securities. Investors were reminded that some safe havens are not so safe. Corporate spreads widened, especially for European car makers, some of the market’s most frequent issuers, but also for corporates in general.

Stable condition

After the poor start to the year, there was no euro corporate issuance at all after mid-January. “We felt the market was open at the end of January, but nothing moved until February,” says Mr Lewis. “The theme of February was a more stable market. The waterfall of bad news had steadied and the oil price stabilised.”

Corporates regained access to the debt market, but at a price, with higher spreads and higher new issue premia. Issuers were high-profile names, concentrating on the shorter end of the curve, and many of them were American, such as United Technologies and Honeywell.

“For the past couple of months, more than 50% of euro supply has come from US corporates, who are traditionally more pragmatic on price,” says Mark Lynagh, BNP Paribas’ head of investment grade bonds, Europe, the Middle East and Africa (EMEA) corporates. “They are attracted by European coupons, and many of them have European operations.”

March had a busy start, with markets anticipating further stimulus from the ECB. When it came, ECB president Mario Draghi sprung a surprise. He said that investment-grade euro-denominated corporate bonds would become eligible for purchase under the bank’s quantitative easing programme.

“It was ground-breaking,” says Mr Lynagh. “There was very little detail around the programme and there will be no corporate buying before the third quarter, but there were some big moves on the day.” By the end of March, corporate spreads were some 40% tighter than they had been at the start of February.

Setting the tone

The ECB announcement set the tone for AB InBev’s mammoth transaction. The Belgian brewer had agreed to pay the equivalent of $108bn for the UK’s SAB Miller in November 2015 and set up a $75bn financing package to complete the deal. In January it launched the second largest corporate bond ever, raising $46bn to take out some of its bridge loans. Now it was coming to the euro market to do some more.

“AB InBev is well liked, and a regular user of the euro markets,” says Mr Lewis. “It comes here once a year to do €2bn or €3bn. It puts the hard yards in, meeting investors, nurturing them and treating them with respect. And the investors loved this deal.”

The week after the Draghi pronouncement, after a go/no-go call, a six-tranche benchmark size transaction for AB InBev was announced, with BNP Paribas, Deutsche Bank, ING and Santander as global co-ordinators. “The market had expected them to rush out straight after the dollar deal and do a euro transaction,” says Mr Lynagh. “But they waited, monitored conditions and hit the right window.”

On offer was a four-year floating rate note (FRN), alongside four-, six-, nine-, 12- and 20-year fixed notes. Investors were hugely receptive. By 11am on the morning of the announcement, the books showed €26bn of orders, rising after price guidance to €31bn. Final pricing for the FRN was three-month Euribor plus 75 basis points (bps). Coupons for the fixed notes were 0.625%, 0.875%, 1.5%, 2% and 2.75% respectively, priced at mid-swaps plus 65bps, 80bps, 100bps, 120bps and 170bps. Final new issue concessions were 20bps to 25bps on the front end of the curve and 25bps to 30bps on the back end.

It was the largest euro corporate bond issuance in history, overtaking Roche’s €9.75bn transaction in February 2009. BNP Paribas had been bookrunners on that deal too, along with Barclays, Deutsche Bank and Santander.

“The AB InBev transaction was significant because it redefined the liquidity that is available in Europe,” says Mr Lewis. “It opened a lot of eyes here and in the US, saying that this is a proper bond market that stands on its own merits. If you make a €5bn to €10bn acquisition and you are the right name, you can fund it comfortably in Europe.”

Revving up Ferrari

Another notable March issue was the debut of Ferrari, the Italian sports car manufacturer. This was the first unrated corporate transaction of the year and, given its pedigree, attracted clamorous attention, with more than 140 investors jostling for space at roadshows in London and Paris.

“It’s not a car company – it’s a luxury goods company,” says Mr Lewis, “and its comp[arable]s are the likes of LVMH and Kering. That’s how we positioned it.”

Bookrunners were BNP Paribas, Citi and JPMorgan. The €500m seven-year issue was kept relatively small, even though the €2.7bn book could have supported a larger size. Its 1.5% coupon was the lowest ever for an Italian unrated bond. “This was as individual a trade as you will ever get,” says Mr Lynagh. “We sold it off the back of the brand name.” Its ticker symbol, he adds, is Race.

The bank also joined Barclays and UniCredit as bookrunners on Deutsche Telekom’s first euro issue for three years, a €4.5bn multi-tranche transaction. This too came shortly after the ECB announcement, attracting orders of more than €18bn for a four-year FRN and seven- and 12-year fixed-rate tranches. Each ended up significantly tighter than initial price thoughts with re-offer spreads of three-month Euribor plus 35bps, mid-swaps plus 45bps and mid-swaps plus 75bps. Coupons for the fixed-rate slices were 0.625% and 1.5%.

Marching onwards

In stark contrast to a dismal January, March turned out to be a record month for euro corporate issuance, at €38bn. BNP Paribas led the first quarter league tables for EMEA corporate investment-grade issuance, according to Dealogic, followed by Société Générale and Deutsche Bank. “We have had a busy year in line with the markets,” says Mr Lewis. “We have a big footprint in debt capital markets and volatile markets play to our skills.”

He expects market conditions for corporate issuance to remain “fair”, at least for the time being, with strong technical support around ECB expectations. But European issuers are more focused than the Americans on getting the best price, he adds.

“The big treasuries have a view on spreads,” he says. “They feel comfortable with their balance sheet strength, so they can wait, and move only when the time is right.”


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