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BONDS
Car giant carves its yield curve
Issuer: DaimlerChrysler
Deals: $2 billion 10-year Eurobond, $1.5 billion five-year Eurobond, $1 billion FRN
Date: August 161999
Bookrunners: Credit Suisse First Boston, Salomon Smith Barney
With its $4.5 billion three-tranche financing in August, DaimlerChrysler firmly put itself on the map as a newly merged entity. This was the second-biggest industrial company debt offering of all time.
And it was done at an awkward moment, bang in the middle of the holiday season when Argentina was looking decidedly shaky too. "DaimlerChrysler wanted to do it before the US Federal Reserve's open market committee [FOMC] meeting," says Andrew Brownfield, managing director at Credit Suisse First Boston, which was joint bookrunner with Salomon Smith Barney.
It was an "unprecedented marketing effort on the ground for that time of year", Brownfield adds.
DaimlerChrysler's aim was to set a benchmark yield curve at three different maturities: six months, with a $1 billion floating-rate note, priced over three-month Libor; and five and 10 years with fixed-rate tranches of $1.5 billion and $2 billion respectively. With three points on the yield curve established, and one hopes a liquid secondary market, DaimlerChrysler should be able to launch new financing deals in future at the most advantageous point of the curve. That's the theory.
The issuer was looking carefully at the secondary market yields of its peer group: Ford and GMAC.
"We gave initial pricing guidance off the Ford transaction," says Brownfield. This was to avoid the distortive effect of an imminent auction of US treasuries and, says Brownfield, "take one variable out of the transaction" - the basis risk between treasuries and single-A corporate debt.
DaimlerChrysler was able to issue within the Ford and GMAC spread, and that differential has been maintained: in mid-January Ford and GMAC were trading at 112 basis points and 114bp respectively over treasuries, and DaimlerChrysler was trading at a tighter 104bp.
By all accounts the issues were well placed, with much of the FRN going to Europe and more of the fixed-rate issue finding a home in the portfolios of US investors.
Don't forget bondholder value, too
Issuer: Alcatel
Deal: €1 billion Eurobond
Date: February 3 1999
Bookrunners: BNP, Deutsche Bank
A year ago, investment bankers' dreams came true and Europe showed it had a serious, integrated corporate bond market. The first big, liquid benchmark deal to show what could be done was the French telecoms company's 10-year, €1 billion bond. Lead managers Deutsche and BNP priced it aggressively, in the view of many French bond investors including banks, who pointed during bookbuilding to the fact that Alcatel's outstanding French franc paper traded around 8 basis points wider. But then, French investors frequently made the mistake last year of using their former domestic market as a guide to life under the new currency.
Anne Roland of Deutsche Bank's euro syndicate in Frankfurt recalls: "At that time there was a lot of scepticism about the depth in the market for single-A corporates and speaking to a lot of banks in the marketplace, many of them said we didn't understand the situation. They said there wasn't room for such a large deal with such a tight spread, which was not where old Alcatel paper was trading."
The domestic market's frostiness meant that just over 90% of the bond was placed outside France. That had the accidental result of showing that the pan-European credit market had arrived. Roland comments: "This was the first transaction where a corporate didn't rely on its home country."
In subsequent months, French corporate bond issues acquired a bad reputation among many European investors, because competitive underwriting bids and issuers' determination to compress the spread as much as possible led to overly concentrated placements, often in the domestic market. When domestic investors realized they could get better deals by looking across Europe, a number of French corporate names widened significantly.
Alcatel wasn't one of them. Instead, its debut euro bond relied on pan-European investor sentiment. Ironically, as Roland points out, this resulted in a tighter spread than the French market offered, whereas later French bonds should have carried rather wider spreads.
Less painful performance
As well as being better executed than some later French bonds, the Alcatel issue performed with greater stability than most other telecoms bonds. Roland notes: "Alcatel didn't join in this frenzy of acquisitions that we have seen in the telecoms sector. They have not been inactive, but they have been taking more care of their investor base and their credit rating than some other companies and this has been appreciated by the market."
The bond hasn't traded over par, but currently trades close to its launch spread of 58bp over OATs, and has thus inflicted comparatively little pain for a telecoms bond. The sector lost some of its attractiveness to the bond market in the autumn, when investors realized that shareholder value and M&A ambition can mean credit downgrades and losses for bondholders. At one point, Alcatel widened along with Mannesmann and other peers, but unlike several other names it recovered quickly.
Euroland takes to high-yield
Issuer: Kappa Beheer
Deal: €515 million and $100 million in high-yield notes
Date: July 16 1999
Bookrunner: Barclays Capital
Last year, the European high-yield market finally began to show it was for real. Since 1997, a number of investment banks had puffed up its prospects and invested heavily in building dedicated operations. But early European deals relied heavily on the fall-back bid from US high-yield investors. Only a small number of issuers, principally telecoms operators Orange and NTL, managed to attract much of a following among European buyers. And the credit shock of 1998 was a set-back.
When Dutch paper-products maker Kappa Beheer launched a single-B debut bond predominantly in euros, it was therefore a major stepping stone towards a self-standing European market. Kappa was seeking funds to refinance Dutch-guilder mezzanine debt resulting from its own private-equity buyout. The company thus had to get funding mainly in its own currency and appeal mainly to eurozone investors. The result was, at the time, the largest euro-denominated high-yield bond.
Frank Sekula, head of European high-yield at bookrunner Barclays Capital, explains: "Up to that time, deals of that size had to be marketed in a big way to US high-yield investors, and making it attractive to US investors meant authoring a large tranche in US dollars. Many of the deals that were structured in the past were never even trying to test the European market. We really had a good feeling about this deal and the potential of the European market."
Kappa and Barclays Capital roadshowed the credit story throughout Europe for a fortnight, and collected enough orders in that period to place virtually the whole bond with European buyers.
But a US roadshow had been arranged, and among US investors the offering was a blow-out. In the end, says Sekula: "The order book was five-times oversubscribed. We could have sold the whole deal in the US or we could have sold the whole deal in Europe."
A landmark deal
The deal was a landmark because it relied on depth in the euro market and used the US bid because it could, not because it had to. Over 70 European investors participated, and according to Sekula it broke new ground in amassing a significant number of e50 million-plus orders.
In addition, it was a financing operation to support the largest LBO carried out in Europe at the time; it came from a debut issuer, and so was more challenging for Europe's often-cautious buyers of credit; and it offered a non-telecoms play, helping investors to diversify.
A further step in the growing-up of euro high yield came when NTL issued a
bond of e810 billion in November, without using a dollar tranche at all. But NTL was already well-known in the marketplace. Kappa's demonstration that the European market can deal with unfamiliar credit stories was arguably the most encouraging deal last year for would-be borrowers. For investors, it wasn't too bad either, tightening by around 60 basis points so far.
