Misjudged GDF Suez hybrid fuels criticism
LONDON, July 3 (IFR) - French energy group GDF Suez received a lukewarm reception for its hybrid bond on Wednesday as volatility reared its head again, but critics said the disappointing outcome was more to do with the execution and structure of the deal.
Global co-ordinators and structuring advisors Bank of America Merrill Lynch and Deutsche Bank had announced details of the triple-tranche dual-currency subordinated bond on Monday when markets were on a firmer footing.
But by the time price talk came out on Wednesday morning around 0820GMT, it was clear that the rally had come to an abrupt halt and that appetite for riskier structures had waned.
The clearest signal of that was a 40bp widening and two-point cash drop to 98 in Dong's hybrid, which had printed a day earlier.
That, one banker said, should have been a good enough reason to hold off for better conditions.
Another banker, also not directly involved in the transaction, agreed.
"Had this come on Monday or Tuesday, it would have been a slam-dunk deal. But with intraday volatility as it was, it might have been better to postpone the deal and to wait for the market to shake out, particularly as this is an equity-related trade and stock markets were sharply lower."
"No one would have blamed the leads for shifting the deal to later in the week, or even next week."
The bookrunners decided to push ahead, however, setting guidance on the euro NC5 and NC8 tranches at 4.125%-4.25% and 5% area, respectively, and at 4.875% area on the sterling NC5.5. Expected ratings for all tranches are A3/BBB+.
Around midday, final terms were set at the wide end of those ranges at 4.25%, 5.125% and 5%, as books only just managed to nudge over the EUR2bn mark that the issuer had hoped to print.
One of the bankers said that the fact there were no details on tranche sizes four hours after books had closed was also a clear indication that the deal had struggled.
"The timing is not helpful, as markets have turned. I can see that, but the whole way this deal has been managed is absolutely shocking," said the first banker.
"To announce GDF on Monday, and then to front-run that by throwing Dong into the mix on Tuesday is irresponsible. There's a finite market for hybrids and why would an investor buy GDF today when Dong has cheapened by 40bp?"
The second banker, however, said the decision to bring the Dong deal on Tuesday when the market was in a healthy state had made sense, especially as the leads had already received around EUR300m of reverse enquiries.
Deutsche Bank was the only bank involved in the structuring of both the Dong and GDF Suez hybrids, prompting some critics to point the finger at the German bank. But BNP Paribas was also a global co-ordinator on both the Dong and GDF deals.
BofA Merrill Lynch, BNP Paribas and Deutsche Bank were not immediately available for comment.
CA-CIB, Citigroup, HSBC, JP Morgan and Societe Generale were also global co-ordinators on the GDF euro and sterling deals.
The first banker gave a whole host of other reasons why the deal had struggled.
The announcement of a simultaneous tender offer on Wednesday was seen as over-complicating the execution process, and was possibly the reason why the deal missed the best day in weeks for primary activity on Tuesday, when EUR4.75bn of supply came.
"It was over-ambitious to add the tender to the mix. It probably slowed down the whole execution process and has made the company less nimble."
The choice of maturities was also called into question, and in particular why the sterling tranche had a shorter call date than the long euro portion.
Either way, the outcome is not good for GDF Suez.
Not only will the company likely have to price a smaller transaction, but it will also be paying up more than it would have wanted to.
The final yields equate to around swaps plus 295bp and plus 330bp for the euro tranches and 340bp over the Gilt curve for the sterling portion.
Based on those levels, the differential between the subordinated bonds and where GDF's senior bonds trade is roughly 260bp-280bp across the three tranches, one observer said.
The differential between EDF's senior and subordinated bonds is closer to 210bp-230bp. Considering that GDF's senior bonds trade inside EDF suggests a steep concession on GDF's hybrids, the second banker said.
There is also a concern that the bond could be an easy target in the secondary market.
"What will be crucial is for the leads to stabilise this deal as soon as it prices. It will be a very easy trade to short," the banker said.
As to whether this transaction could close the market, the banker remained upbeat.
"Another issuer decided not to go ahead this morning, but there's no reason that we couldn't see a deal tomorrow, even though it is the ECB meeting and the US is on holiday. That would not stop a euro trade if conditions are better. Issuers are conscious that they are edging closer to blackout periods."