* Triple B peripheral names are top investor picks
* Strategists call corporate bond yields "unnervingly low"
* Investors demand longer maturities
* Hybrids offer key competition for senior paper
By Josie Cox
LONDON, Jan 17 (IFR) - High-quality European corporate
credits will be forced to offer juicier premiums and longer
maturities on new bonds in order to compete with higher yields
available from weaker names.
With many investors preferring to chase returns by going
down the credit spectrum, better rated issuers are finding it
"The problem is that we're in a very risk-on environment at
the moment," said Markus Steilen, syndicate manager at
Commerzbank in Frankfurt.
"Investors aren't seeking exposure to the safest possible
names, because they're simply comfortable with more risk so that
they can secure a higher yield."
European strategists too, are steering investors away from
names rated single A and higher, feeling that the yields on
offer are too low - and likely to keep falling.
"We recommend keeping minimum exposure to low-beta names,
and loading up in high-beta and high-yield as much as feasibly
possible," said Societe Generale strategists Suki Mann and Juan
With the iTraxx Main index now at 70bp - close to a more
than three-year low, and 40% tighter than this time last year -
they say current corporate yields are "unnervingly low".
The somewhat lacklustre performance of recent bonds in the
secondary market has underscored these difficulties facing
Some of the deals for German automakers and chemicals group
BASF traded as much as 5bp wider over mid-swaps on the break.
"BMW's bonds, for example, had a decent enough new-issue
premium but a very low underlying yield," said Jens Vanbrabant,
lead portfolio manager at ECM Asset Management. "As a result the
Meanwhile investors are being lured by the plentiful supply
of alternative paper on offer further down the ratings spectrum
from subordinated, hybrid bonds as well as in the senior sector.
Names like Valeo, APRR and ASF all managed to generate
vigorous demand over the past fortnight, with new issues trading
as much as 5-6bp tighter in the secondary.
On Tuesday, Enel spin-off Snam printed EUR600m of 10-year
bonds at mid-swaps plus 128bp that subsequently tightened by as
much as 6bp despite offering just a 4bp premium. Order books
On Thursday, Telecom Italia printed its first bond as a
junk-rated corporate - a EUR1bn seven-year offering that
attracted a massive book of more than EUR7bn, while French
investment company Wendel, rated BB+ by S&P, on Tuesday
attracted a 7.5-times subscribed book on its EUR400m seven-year
Leads said this chunky order book was down, at least in
part, to a substantial bid from traditional high-grade buyers.
Many investors have said that the subordinated format has
presented a perfect opportunity to gain access to some very
attractive names while also ensuring spread.
One London-based asset manager said he had bought EDF's
triple-currency hybrids, for example, because French state
ownership means the risk of default or coupon deferral looks
"At the same time, the hybrid is just so much more
attractive than senior because yields have come in too much."
In 2013, hybrids returned over 6% compared with the
relatively paltry 2.5% from senior investment corporate credit -
and some credit strategists are forecasting that those returns
could be even lower if yields continue their journey south.
The average maturity for euro investment-grade senior
corporate paper in 2013 was just over seven years. So far this
year is at 7.4 years. And, as yields dwindle, many in the market
say this is simply not enough.
"Slapping a 10bp premium on is immediately going to make a
bond look more attractive," one origination official said.
"But to ensure no unnecessary money is left on the table,
corporates should be looking at maturities above the seven or
eight year mark," one origination official said.
(Reporting By Josie Cox)