RBS taps into growing appetite for corporates

Corporate is the new sovereign, as they are saying in the bond markets. While downgrades and a general sense of crisis hang over sovereigns and financials, investors feel they are on firmer ground with corporate paper and investment grade issuers have stepped up to oblige. Some have seen opportunities outside the mainstream dollar and euro markets –­ in private placements, for example, and alternative currencies – and the team at RBS has been showing what is possible. 

"Investors want to invest in corporate bonds, so a number of issuers have been pre-funding their 2012 needs," says Nicholas Bamber, RBS head of investment grade bond origination and private placements. “The most active has been the US dollar market, which remains open when others are closed. Is it the best value? That changes depending on basis swaps and new issue premiums. Some issuers have been willing to pay the price for certainty, which may be an extra 20 or 30 basis points [bps]." 

The euro market, on the other hand, is "clearly a window market", Mr Bamber continues. "It is open and then it closes, and the question is can you get it done there and then?" Recently, some of these windows have lasted less than a day so, although very large order books can be built up, trading in the aftermarket can be disappointing. 

Private placements   

Issuers looking to raise very large sums still need to tap the dollar or euro markets. However, those looking for funding diversity or good value could do well to check out alternative markets that have been more consistently accessible than, say, the euro. One is the private placement market. 

"For the past 15 years, the private placement market has been open week in, week out, with the exception of the fourth quarter of 2008, when pricing was so volatile that it was tough to do a trade," says Tony Fordham, head of European origination within the RBS private placement group. 

The investors are real money accounts, principally insurance companies with continuous receipts of cash looking for a home. These are textbook buy-and-hold investors, and the market is relatively steady, pricing on trends rather than daily volatility. "It is more about matching assets and liabilities, and there is no secondary market to speak of," says Mr Fordham. 

Private placement investors are mainly American. For them, it is partly a way of diversifying into foreign names that might be inaccessible via public markets. They also like the returns, which they feel are appropriate relative to the mainstream dollar market. One of the great attractions for them is that these deals come wrapped in tight financial covenants that invariably trigger earlier than those in public transactions. 

"They don’t publish the data but, anecdotally, recovery rates in their private portfolios far exceed those in their public portfolios," says Mr Fordham. "The result is that total returns are better." Two-thirds of the companies that choose this route, and perhaps half of them by value, are unrated. These are illiquid stocks, and investors require a liquidity premium but that is effectively negated by the value of the covenants. "So these deals should price near a public trade," adds Mr Fordham. 

So far, few European life companies have become fans of private placement. They like their portfolios to be liquid and, in the absence of hard figures, have yet to be persuaded that the returns are superior. But even if many European insurers are staying away, European corporates clearly like the market. This has been the best year for European corporate private placements since 2003, Mr Fordham says, with $14.3bn placed in the first three quarters, compared with $10.6bn in all of 2010. 

Market resilience

Compass Group, the world’s largest caterer, showed just how resilient the market can be when it raised $1bn at the start of August, just as the eurozone debt crisis was deepening and US budget worries were mounting. These deals take a little longer to orchestrate, with no intraday heroics, so they can be vulnerable to unfolding events. Between the London and New York roadshows in late July and pricing in early August, US Treasury yields tightened by more than 70bps. "Yet Compass still got very attractive pricing," says Mr Fordham. 

Agents for the deal were RBS, HSBC and Société Générale, with RBS lead left. The initial book was six times oversubscribed and Compass was able to issue in three tranches – seven, 10 and 12 years, with coupons of 3.331%, 3.98% and 4.12%, respectively, each representing a spread of 147 bps over Treasuries. This was the largest private placement since 2008. 

As Mr Bamber points out, Compass is rated (Baa1/BBB+), and has issued in the public euro and sterling markets as well as having previously trodden the private placement path. "We looked at all of those in terms of certainty of execution and pricing, and private placement won on both counts," he says. 

While pricing and ease of execution may attract large international companies such as Compass, private placement can also suit mid-sized corporates who may be unfamiliar with the debt capital markets and are taking their first step away from an exclusive reliance on bank funding. The market does have its limits, however. Since it comprises a maximum of, say, 50 investors, they can absorb only so much from any one name – with a ceiling of about $1.5bn, according to Mr Bamber. 

A different alternative

An alternative market of a different kind is in Swiss franc issuance, although it was virtually non-existent before the end of this summer. "The corporate market in Swiss francs was nearly closed during the first half [of 2011], because an unfavourable basis swap market made arbitrage rather challenging," says Patrick Raeber, RBS head of Swiss franc syndicate. "Since then, however, the intervention of the Swiss National Bank has moved the market in the currency’s favour." 

This is a market with some depth. Swiss investors, institutional and retail, are cash rich, Mr Raeber says, and with Swiss interest rates at historic lows they are keen for corporate paper. Swiss franc deals have accordingly been appearing since early September. One that proved popular was a GDF Suez transaction that raised SFr300m ($334m), with RBS as joint bookrunner alongside BNP Paribas and Deutsche Bank. 

Since it acquired the UK's International Power last year, GDF Suez has been the world’s largest utility, and it enjoys ready access to any market it chooses. As the Swiss franc eased against the euro, however, it became clear that it would be advantageous to do a trade in the Swiss currency and swap back. "We had been in active discussions for some weeks but we made the decision on one day and launched the next,” says Mr Bamber. “Speed is of the essence, so you know where you stand – surprises from left field are very possible." 

The issuer was looking for SFr250m to begin with, quoting price guidance in the mid-swaps plus 60bps area, which was where the issue finally priced. The coupon was an economical 1.5%, seen as a trigger level for Swiss investors, and the tenor was set at six years. A five-year deal would have appealed more to retail investors, but falling swap rates meant that only a six-year deal would allow the re-offer yield to breach the important 1.5% level. 

This was GDF’s first Swiss outing for three years and investors liked its rarity, its A rating and the fact that it is a defensive utility. The company paid 15bps less than if it had gone to the euro market and pulled off a satisfyingly cheap deal. But why did investors go for it? Because corporate is the new sovereign.