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French telecoms systems company Alcatel is one of the European corporate debt market's most innovative issuers. At the end of May the company issued a $500 million FRN with a structure new to the European markets. Bookrunner JP Morgan labelled it a dealer remarketable security (DRS), a type of issue that many borrowers have used in the US with some success. "A dealer remarketable security is a way to significantly reduce the cost of debt through the sale of an option," says an Alcatel source.
The value is added by selling the put option in the derivatives market rather than the bond market. Philippe Dischamps, head of fixed-income origination for France at JP Morgan, explains that the structure is based on a flat dollar yield curve which creates value in put options. "Options are based on volatility, but with historically low US interest rates it seems unlikely that rates will go much further down," he says. "This DRS structure makes sense if a company has a strong view on US interest rates or if it already has a high exposure to these rates in its liability profile."