With corporates hungry for cash, European bond markets rebounded from a hiatus in early March in a big way – and Citi has been at the helm of many of the deals. 


Santhi Athreya, head of DCM for France, Belgium and Luxembourg and William Weaver, head of DCM EMEA

Covid-19 may have sent nations around the world into lockdown, but its effect on corporate bond issuance has been the very opposite of intimidating. In the eight weeks from mid-March, as lockdowns spread, volumes in the euro market leapt to more than triple those in the same period in 2019.

Citi’s debt capital markets (DCM) Europe, Middle East and Africa (EMEA) team has played a leading role in the upsurge. “Our clients’ needs for funding rose significantly as they looked to bolster liquidity and protect their businesses from further macro deterioration,” notes William Weaver, Citi’s head of DCM EMEA. “During this period, the corporate team has been incredibly active while working from home.”

At the start of 2020, the team was already anticipating an active year. “We expected an increase in merger and acquisition financing and in general financing,” recalls Tomas Lundquist, head of European corporate DCM. “In fact, in the year to date, volumes of corporate issuance are up by 80%.”

Short-lived panic

Market uncertainty in February gave way briefly to panic and paralysis in European and North American markets at the beginning of March. The primary market shut down and secondary market spreads widened alarmingly.

But the rabbits didn’t stay frozen in the headlights for long. The US market reopened emphatically in mid-March, after the US Federal Reserve said it would buy short-term corporate debt. On March 17, nine US investment grade issuers raised a total of $25bn, paying significantly more than they would have done only weeks before. Citi led issues from Exxon, Verizon and PepsiCo.

The following day, March 19, the European Central Bank announced a new €750bn asset purchasing programme, to include corporate bonds. That bolstered the confidence of EMEA issuers and their investment bankers, and the European market was reopened on March 20 by consumer goods conglomerate Unilever and French energy producer Engie.

Funding surge

Having learnt the lessons of 2008, many corporates concluded that it was important to have spare funding in a time of crisis. “With economic recovery uncertain, issuers wanted to raise funds in case there was long-lasting negativity,” says Mr Lundquist. Accelerating funding plans for the year was a key driver for the upsurge in issuance, he explains.

Unilever announced a dual tranche transaction in five- and 10-year tenors, with a €1bn expected deal size, and BNP Paribas, Citi, Deutsche Bank and Goldman Sachs acted as bookrunners. What made the transaction really different was that, for the first time in the European market, most of the participants on both buy- and sell-sides were working remotely, from home.

US transactions have for some time been marketed on the phone and via virtual roadshows. “But in Europe we have traditionally seen investors face-to-face,” Mr Lundquist says.

At the outset, no one was quite sure how well this would work. “It was a bit of a test for the market, to see if investors would buy into a credit based on telephonic interaction,” says Janusz Nelson, Citi's head of European corporate bond syndicate. “The answer was a firm ‘yes’.”

On the same day, Engie joined the party. It brought a triple-tranche transaction in five years and (both in green format) eight and 12 years, with bookrunners Bank of America, Citi, Commerzbank, HSBC, Mizuho, Natixis, RBC and Société Générale. The size, it said, would be €1.5bn or more.

Raising confidence

“When Engie and Unilever hit the screens in decent size, it gave the corporate investor base confidence,” says Mr Nelson. “They had been running for cover in early March, having had a lot of outflows – more than for some years. But the outflows slowed and have since turned into inflows.”

Unilever’s initial price thoughts were mid-swaps plus 165 basis points (bps) area for the five-year and plus 195-200bps for the 10-year tranche. That represented a toothsome new issue premium of 60-65bps and it had the desired effect. Combined order books swelled to just short of €12bn, slightly more than half of it for the 10-year issue.

The deal was expanded to €2bn as a result, with spreads set at 140bps and 170bps respectively. That indicated a final concession of 35-40bps which, under the circumstances, was judged a “very successful” outcome.

Like Unilever, Engie launched its first deal of 2020 with generous pricing indications. They were plus 180bps area for the five-year, 200bps area for the green eight-year and 235bps area for the green 12-year.

Having attracted combined orders of €9.6bn, Engie was able to grow the overall size of its deal to €2.5bn. The €1bn five-year tranche was priced at 160bps over mid-swaps. The other two tranches were sized at €750m each, with spreads of 180bps and 210bps respectively. Bankers said this indicated a 40-45bps new issue concession.

European push

These two successes emboldened many other European issuers to fund while they could – in case there came a time when they couldn’t. In the year to the end of May, Citi led more than 40 euro-denominated corporate bond deals, worth around €50bn, for some of the best names in Europe. They included LVMH, BAT, Repsol, AkzoNobel, SAP and WPP.

“Many investors recognised that this might be a very rare opportunity to buy issues at these spread levels,” Mr Nelson says, though he adds that, after the recent rally, they have now begun to question value levels a bit more.

Having issued once, some corporates promptly came back for more. Among the many repeat issuers were Eon, Telefónica, Heineken, Veolia, Total, LVMH and Suez. Suez, the French utility conglomerate, issued a €850m seven-year bond at the end of March (4.7 times oversubscribed), and then returned in early May for another €750m in a 15-year offering (2.1 times oversubscribed), achieving its lowest ever coupon in this maturity.

Santhi Athreya, head of DCM for France, Belgium and Luxembourg, is not surprised that French corporates featured heavily in the list of repeat issuers. “During the last financial crisis, a lot of French corporate managements decided that liquidity was important to their security and so they funded,” Ms Athreya says. “There have been several repeat issuers in the last two months, with many of them able to lock in historically low coupons the second time.”

The European crossover and high-yield markets have also reopened, with positive outcomes. In May, Nokia (Ba2/BB+/BBB-) raised €1bn in a dual-tranche transaction with five- and eight-year maturities. “There was a fair degree of caution with this, the first crossover deal, and we started with a 60bps concession,” Mr Nelson says. “With order books between €2bn and €3bn on each tranche, we printed at around zero.”

Online roadshows

Virtual marketing has not deterred some debut issuers. Under lockdown, Citi led successful first-time bond deals for Swiss fragrance and flavour business Firmenich (raising €1.5bn), Dutch lighting company Signify (€1.275bn) and Swiss chemicals and biotech manufacturer Lonza (€500m).

All three relied on phone calls and a NetRoadshow.com presentation. “This will stick,” Mr Lundquist says. “It truncates the time taken significantly – 48 hours instead of a week.”

In the year to end May, Citi was second after BNP Paribas in bookrunner rankings for all EMEA corporate issues (including US dollar deals) by value, according to Dealogic. At the time of writing, however, it claimed first place in all EMEA corporate DCM for the first two months of the second quarter – the lockdown months.

“It’s all about the second quarter this year, given the first quarter was six weeks and then the market closed,” Mr Lundquist says. “So the second quarter is what matters, with the huge volumes done then. This is the most important quarter in the history of the corporate bond market, and really captures our role in leading in this extraordinary quarter.”

After this feast of issuance, volumes may quieten down, and the outcome for the rest of the year will depend on inflows to funds and second-quarter corporate earnings, the team reckons. “The early stages of the reopening were dominated by large, well-known and highly rated companies,” Mr Lundquist says.

“As markets have fully reopened, we increasingly see smaller and rare issuers coming to the market as well, including debut names. While it’s hard to see the incredible volumes of March and April continuing at the same pace, we still expect markets to stay fairly active.”


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