France Telecom suffered from a disappointing new-issue expedition in October, paying more spread and obtaining less cash than it wanted. Six banks were announced as mandated for a two-tranche deal with an expected size of €2 billion to €2.5 billion. The prospects were excellent since investors are crying out for bonds – year-to-date corporate supply amounts to a paltry €72.1 billion, down 17%
on the first nine months of 2004. Things are not getting better, HSBC forecasts total issuance from the corporate sector this year to amount to €85 billion to €90 billion, well below last year’s €106 billion.
In these circumstances the borrower should have had no problems obtaining the €3 billion it really wanted but ended up walking away with just €2 billion in two tranches split equally between a five-year and a 10-year bond. Worse still was the fact that price talk started at three-month Euribor plus 25 basis points for the five year and plus 45bp to 47bp on the 10 year but the leads were forced to widen the deal and ended up printing at plus 27bp and 49bp.
The final ignominy came when the bonds widened on the break of syndicate. But with six banks (Barclays Capital, Deutsche, IXIS, JPMorgan, Merrill Lynch and SG) sharing the book it is hardly surprising that none of them felt particularly responsible for stepping up and supporting the deal. Admittedly market conditions did deteriorate during the pricing but in the age of bookbuilding and pot execution this kind of execution was meant to be a thing of the past. It was, after all, a straightforward senior debt transaction for a credit with an extremely well defined curve. There was also some confusing talk from the borrower about M&A ahead of pricing that helped contribute to lack of interest in the transaction.
Bankers not involved in the deal insist that, when there are slightly difficult market conditions, mandating fewer leads will pro
vide better execution. They say it is always difficult to control a new issue when there are various banks trying to impress the borrower with the quality of their advice.
Had France Telecom got the spread it originally wanted on the 10-year bond, for instance, it would have had an extra €3 million in its account right now. Why so many underwriters on such a modest issue? France Telecom, like all corporates, is under serious pressure to reward its relationship banks with primary market offerings but this deal shows that more is sometimes less.