* 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
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
"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
"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