Corporate euro FRN issuance surges to all-time record
* Q1 corporate euro FRN issuance rises 77%
* Investors eager to diversify beyond fixed rate
* Borrowers able to raise cheaper funding
* Bankers cautious on prospects
By Josie Cox
LONDON, April 2 (IFR) - Corporates issued more euro floating rate notes during the first three months of this year than during any other quarter in history, driven by competitive pricing levels and investors' desire to diversify beyond their fixed rate staples.
Non-financial corporate FRN issuance in euros hit USD25.389bn-equivalent between January and March, according to Thomson Reuters data, up 77% on Q1 2013 and beating the previous US22.7bn record that was hit in Q2 2007.
Bankers said the main driver was the pricing premium corporates can score by choosing floating rate bonds over fixed rate deals, but that the trend was also supported by investor demand for higher yielding short-term assets.
"There is a stronger bid from bank treasuries and funds, as well as insurance companies looking for an investment alternative to parking their cash in low yielding short money market funds," Philippe Bradshaw, head of Europe corporate syndicate at RBS said.
He added that FRNs also offered an attractive hedge for those investors holding fixed rate debt who - despite the dovish stance of the ECB - expect interest rates to rise.
For borrowers, the format offers savings versus fixed rate issuance, especially at the shorter end of the curve. Bayer, for example, saved around 5bp when it sold a EUR500m March 2017 floater last week.
Frazer Ross, managing director on the global risk syndicate desk at Deutsche Bank, said that savings of anywhere between 5 and 7bp had become the norm, and that an additional benefit was "the ability to target a slightly different investor base to the traditional fixed rate buyer".
As well as the cost saving element, size restrictions in the FRN market no longer seem to apply.
Between 2000 and the start of this year, FRNs were typically sized at EUR200-300m and stemmed almost exclusively from the German auto market.
Since the start of the year though, deals have regularly been sized at EUR500m and above, and have spread into other sectors. Syndicate bankers are now targeting a much wider range of investors with the product too.
Last week, an EUR850m four-year FRN for Anheuser-Busch InBev attracted a EUR1.75bn book, more than the EUR1.4bn orders received by the brewer on the same day for a EUR650m September 2021 fixed rate deal.
"AB InBev has a very well established investor base for fixed rate paper, so the fact that the book on the floating rate part was bigger than on the fixed just goes to show how attractive FRNs look at the moment," one London-based investor said, who took part in the FRN trade.
Meanwhile, a EUR1bn three-year FRN from BMW last week was the largest in the currency from a non-financial corporate in over seven years, excluding retail-driven deals, according to bankers involved.
GIMMICK IN THE LONG RUN?
There are caveats, though, and some bankers think the swelling market could disappoint in the longer term.
"Traditional buy and hold investors prefer term fixed rate bonds to FRNs," Marco Baldini, Barclays' head of European sovereign, supranational, agency and corporate syndicate said.
"This, coupled with the fact that FRNs do not go into the main corporate bond indices, means that over time they will underperform like-for-like fixed rate bonds, which is something issuers need to consider."
RBS's Bradshaw said that he too does not anticipate a supply explosion in the market, as investors still have a strong appetite for other products that offer much more substantial yields.
"There is still a very strong bid for duration, for example, from investors with return targets," he said.
On Monday, Belgian electricity transmission system operator Elia printed a EUR350m 3% 15-year bond, attracting orders just shy of EUR2bn.
"Knowing that you're going to be paid 3% for 15 years is still an attractive prospect," a second London-based investor said.
"Theoretically, FRNs do offer a hedge in that they sweeten a deal if rates creep up. But in the current market environment I wouldn't bet anything on rates rising," he said. "At least not in the foreseeable future in Europe." (Reporting By Josie Cox, editing by Helene Durand and Julian Baker)
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