Corporate hybrid storm tipped to rage through September
* Hybrids tipped to dominated corporate issuance in September
* Yield pick-up to senior still attractive for investors
* Telefonica tipped to be next in market
By Josie Cox
LONDON, Sept 6 (IFR) - Corporate bond supply is likely to continue at a ferocious pace throughout the rest of the September, but will be unusually skewed towards subordinated issuance, bankers said on Friday.
"We think that the key ingredients that in our view drove the expansion in hybrid issuance [so far] in 2012/13 are still in place," Barclays strategists said.
"We are still in a relatively low rates environment in which investors are attracted by the yield pick-up offered by the hybrids on the one hand and, on the other hand, hybrids remain a relatively cost-effective capital/funding instrument from the issuer's perspective."
This week a total just over EUR14.1bn-equivalent of high grade corporate bonds priced in the European market, not only thrashing a weekly record for 2013 but representing the busiest week since September last year.
Of that, 27% came in the form of hybrid notes, indicating that the instrument is still a top pick for many companies - especially those under ratings pressure.
Typically, safe credits reopen the European market after the summer break, but there continues to be strong investor appetite for riskier transactions that offer additional yield.
So far this year, almost EUR20bn-equivalent of hybrids in euros, sterling and US dollars have priced in the European market, already outpacing all previous full-year records.
Following issuance of EUR1.7bn-equivalent of hybrids from Enel this week, Telefonica, rated Baa2/BBB/BBB+, is hotly tipped to be the next peripheral borrower to make use of the instrument.
The Spanish telco has said that it plans to fund 50-65% of the expected EUR4.14bn bill for the purchase of KPN's German unit with hybrid capital, with a goal of maintaining its leverage ratio.
On Friday, it announced that it had mandated BBVA, BNP Paribas, Citigroup, HSBC, Morgan Stanley, Societe Generale, UBS and UniCredit as joint bookrunners for a roadshow ahead of a possible perpetual euro deal.
Other corporates loosely considered to be candidates for the market include EnBW and other German utilities, Gas Natural, Holcim, Solvay, Lanxess, Bayer, Linde, Bouygues and Alstom.
Having already issued this year, some credit experts have also said they would not be surprised to see additional hybrid issuance from Telecom Italia, National Grid, EDF and Enel.
This week there was vague speculation that German steelmaker ThyssenKrupp could be eyeing the market in the long-term as it battles with sky-high leverage.
But one banking source said that the company would have to issue equity or at least convertible bonds, to shape up its balance sheet before it could even consider the subordinated debt market. (Reporting By Josie Cox, editing by Alex Chambers and Julian Baker)
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