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CAPITAL MARKETS

Corporate finance: Blue chips strike funding gold

Once a risky debt investment compared with sovereigns and even banks, corporates are now the safe haven. They continue to access the euro bond markets even as sovereigns and banks struggle to fund. Large corporates are keen to reduce their reliance on bank funding and to widen their use of capital markets instruments to match-fund assets and reduce counterparty exposure to banks in the derivatives market. Debut corporate issuers are following their example.

The primary debt capital markets threatened to seize up, as the European fixed-income markets suffered renewed volatility in May amid growing fears of the possible severe contagion effects on sovereign and bank bonds from a Greek exit from the euro.

On May 9, one of the busiest corporate issuers, German auto-maker Volkswagen, which has completed several deals in niche currencies and the larger bond markets in 2012, prepared to test the market with a five-year euro-denominated benchmark offering. Market participants braced themselves to see if the investor community would support a €1 billion deal amid such widespread risk aversion, as the underwriters offered price guidance of 65 to 70 basis points over mid-swaps.

They need not have worried. The deal generated a €3.3 billion order book from high-quality accounts attracted by a yield of just 2% for the single-A- rated issuer. Volkswagen felt able to increase the size of the deal to €1.5 billion even while offering only a modest new-issue premium of just 9bp over its interpolated secondary curve, after pricing at the tight end of the range.

"We are particularly happy with the outcome of this transaction as it came on a very volatile day," Kai Otto, head of capital markets and asset management at Volkswagen AG, tells Euromoney.