Thus far, 2012 has witnessed a marked trend of corporates eschewing bank lending and turning instead to the debt capital markets. By acting quickly, the DCM team at SGCIB has put itself at the forefront of many of these deals.

As the process of bank disintermediation gathers steam across Europe, corporate bond issuance has gone into overdrive in 2012. More and more companies are finding it easier or cheaper, or both, to fund themselves in the capital markets rather than to borrow from their banks. And the debt capital markets (DCM) team at Société Générale Corporate and Investment Bank (SGCIB) has been as busy as any in helping them to do it.

SGCIB is generally among the top five in international euro-denominated bond issuance, but in the corporate euro market it has often trailed the big behemoths, Deutsche Bank and BNP Paribas. In 2012, however, it has led the pack for much of the first two months of adrenalised issuance. By early March, BNP Paribas had overtaken it in deal value, but SGCIB continues to have an effervescent year, with its name on the tombstones of most mainstream French and German deals, as well as increasing number in less obvious jurisdictions such as Spain and Ireland.

“We see a clear trend of disintermediation,” says Demetrio Salorio, global head of DCM at SGCIB. “Bank lending is decreasing and it is not going to come back, but the need for debt remains. So there will be increased usage by European corporates of the debt capital markets to raise strategic finance, regardless of the economic climate.”

This is proving true so far in 2012. The disintermediation trend aside, Mr Salorio ascribes 2012’s storm of issuance to two principal micro-factors. “Because the second half of [2011] was so volatile, many transactions did not get executed. So we have seen many in 2012 that were not done [in 2011]. Then there are many corporates who see a gloomy future and, with rates low at the moment, they have decided to raise liquidity in these good conditions, in case they deteriorate.”

A new safe haven

None of this would be possible without receptive investors, and they have not been in short supply, with plenty of cash. “A lot of companies are in stronger shape than they were in 2008 – leaner, meaner and better prepared to weather the storm,” says Brendon Moran, SGCIB's London-based co-head of corporate origination. “They are now seen as a safe haven asset class, and large numbers of them can price inside financial institutions and sovereigns." 

One of the reasons that SGCIB is having such an active year is because it had an inkling of what was to come. Felix Orsini, Paris-based co-head of corporate origination at the firm, says that the bank noticed a shift in corporate mentality around November 2011. “It went from wanting to see others issue before they did, to wanting to be first themselves,” he says. “So we asked ourselves which issuers could open the market in January, and were prepared when the market opened.”

The bank was joint bookrunner on all three of the traditional new year German auto issues. BMW raised €2.5bn in equal three-year and seven-year tranches. In its largest DCM deal since May 2009, Volkswagen issued €1.5bn in three-year and €750m in seven-year fixed-rate notes. And in a multi-tranche offering, Daimler sold $400m in 18-month floaters, $650m in three-year fixed and $600m in five-year fixed-rate notes.

While Daimler is a regular issuer in the US dollar market, other SGCIB deals have been notable for diversifying away from an issuer’s natural currency base. “In the post-crisis environment, corporates have learnt that they need to diversify their funding sources more than ever,” says Mr Salorio. “They need to tap globally.”

Oil company BP, which used to rely heavily on the dollar market (at least until its Gulf of Mexico disaster), was tapping globally when it raised €2.5bn, split equally between a four-year and a seven-year tranche. Deutsche Telekom moved in the opposite direction with a $2bn transaction, similarly divided between five-year and 30-year notes – its first 30-year offering since 2000. 

New formats

A subset of the disintermediation trend is the growth of project bonds, as the new regulatory regime promises to make hefty, long-term infrastructure lending more costly for lenders. Actively encouraged by the European Commission, project bonds have been a source of new business for the investment bank. A good example in the UK was Gatwick Airport’s second outing to the bond market, raising £600m ($940m) in 12-year and 25-year notes. The pricing represented a material improvement over the bank market.

Another project bond came from Abu Dhabi majority-owned Dolphin Energy, which operates in the Qatari gas fields. It abandoned plans for a 144A/Reg S issue in mid-2011 when conditions got ugly, but revived them in February. Reopening the conventional bond market for Gulf-based issuers, it raised $1bn in 10-year money, quickly followed by a $300m tap on the back of a reverse enquiry.

“In five or six years, we will see a liquid and ample project bond market in Europe, much like [in] the US and Canada, where project bonds are now the main source infrastructure finance,” says Mr Salorio.

In 2011, issues from corporate first-timers represented 15% of euro corporate issuance and 40% of high-yield issuance (compared to 23% in 2010). “That’s a real sign of maturity, particularly for non-investment grade,” says Mr Moran. “It shows that this market is established and has legs, forming an important and viable backstop to a bank market under pressure.”

Like their higher rated brethren, high-yield transactions were jammed in a backlog at the end of 2011, often obliging sponsors to seek bridging finance. High-yield investors ended the year with exceptionally large cash balances, of the order of 15%, compared with a more traditional 5% to 6%, according to SGCIB’s global head of high yield, Tanneguy de Carné.

Breakthrough deal

High-yield deals take longer to pull off so it was only in the third week of January that the logjam was broken. After eight days of roadshowing in the US, London, Frankfurt and Paris, Polish mobile operator Polkomtel launched a dual-tranche euro and dollar transaction to raise the equivalent of €900m. In June 2011, Société Générale was part of the syndicate that committed bank and bridge financing for the acquisition of Polkomtel by the one-man private equity operation, Polish entrepreneur Zygmunt Solorz-Zak. In 2012, it acted as joint bookrunner for the refinancing of that debt, in a transaction that was 2.5 times oversubscribed.

“There has been a structural change in leveraged market liquidity since 2008,” says Mr de Carné, noting how the leveraged buyout market’s dependence on senior bank and collateralised loan obligations debt has been migrating to the bond market. “Asset managers who want more return are looking at higher return products such as high yield,” he says. “Default rates are well below average, and high yield has had only two negative years in the past 25.”

Mr de Carné points to the fact that, while high yield was always seen as expensive, bank debt has had to adapt to the cost of funding, pushing up loan prices. “The spread differential between the high-yield bond market and the loan market has become acceptable,” he says, adding that high yield’s longer terms and covenant-lite features add to its attraction for borrowers.

Yet another driver of today’s corporate market is liability management, according to Mr Orsini. SGCIB acted as sole dealer manager on a tender offer by German family holding company Haniel, redeeming 24% of an outstanding 2014 issue. Simultaneously, it was joint bookrunner for a €600m bond which extended its maturity profile to 2018.

SGCIB is sanguine about 2012’s prospects, while accepting that the world remains an unpredictable place. “There are substantial risks,” says Mr Salorio, listing Europe’s sovereign crisis and austerity versus growth debate, French elections, an Irish referendum and Chinese economic landing scenarios, among others. “Maybe there will be times when we cannot execute transactions. But the underlying forces are positive. Disintermediation is here to stay. We have supply and we have demand, so I would say conditions are excellent for the corporate market to develop.”


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