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Is a wave of hybrid liability management deals imminent?
June 20, 2014 / 2:47 PM / 3 years ago

Is a wave of hybrid liability management deals imminent?

* Suez Environnement leads the pack in addressing 2015 call

* Liability management desks are pitching to hybrid borrowers

* Corporate hybrid spreads continue to compress

By Charlie Thomas

LONDON, June 20 (IFR) - European corporates who sold hybrid bonds in 2005 and 2010 should think about buying back their securities and issuing new deals to take advantage of current low interest rates and benign markets, say coverage bankers.

At least 10 European corporates with more than 8bn in subordinated hybrid structures face their first call date in the next 12 months, prompting a flurry conversations with investment banks keen to undertake liability management exercises.

And there are at least four more European issuers due to call in 2016, followed by another 10 in 2017, meaning the total amount of callable hybrid structures stands at 22bn minimum in the next three years.

Suez Environnement was the first corporate issuer to address an upcoming 2015 call this week, launching a new issue alongside a debt buyback.

“This is a hugely interesting topic, and I think Suez Environnement could be the first of a wave of corporates,” said Kapil Damani, head of capital products at BNP Paribas.

Locking in rates, and extending the call period and duration of the bond are the key drivers for such action.

The French waste management company issued a 500m perpetual non-call six-year bond at a yield of 3.125%, while at the same time offering to tender 300m of its 4.82% 700m hybrid callable in September 2015.

The tight pricing and low coupon achieved by Suez have prompted questions about whether other corporates could look to follow suit. French hotel chain Accor is expected to launch something similar next week.

TO LM, OR NOT TO LM

Much depends on the companies’ individual hybrid structures and market conditions. It was only in April last year that Barclays strategists said few would choose to call in 2015 because of the difficulty of pricing new deals with tighter spreads.

But in the last 12 months, hybrids have been printing at extremely tight levels, with the senior/subordinated differential compressing to around 170bp-175bp.

But even taking into account this spread compression, issuers may still decide not to call. German sugar producer Suedzucker has said it is unlikely to do so for its 700m bond callable 30 June 2015. The deal switches from a 5.25% fixed rate to floating, paying three-month Euribor plus 310bp - just 3.3% based on current Euribor levels.

No sub hybrid has priced with a coupon lower than 3.125%.

Savings of up to 2.95 percentage points could be achieved by other issuers with bonds callable in 2015 and 2016 if rates stay low, ING said in a credit note recently.

But issuers thinking of preempting the call have another consideration: the risk of Standard & Poor’s withdrawing its equity treatment.

“S&P is the main hurdle, it currently doesn’t want to see anything happening in the first five years, but after that liability management represents a useful tool for many issuers,” said Damani.

ANATOMY OF AN LM EXERCISE

First, liability management bankers will need to assess the replacement language on the original deal. Some look like senior bonds, where the issuer is granted the right to buy it back at any price and time. Some mention an “intention to replace”, while others will have no explicit replacement language at all.

Only two corporates have actually replaced existing hybrids with new: Suez Environnement and Dong Energy in 2012.

A banker who worked on the Dong deal explained how strategy and timing were key to getting the deal done after the company’s initial attempt to buy back in the standard way was foiled when markets turned during the process and the issuer baulked at paying wider spreads.

“The decision of which order you’d do it in is entirely dependent on market conditions,” the banker said.

When the deal actually took place in January 2012, however, the new issue came first and the tender second.

Bankers expect to see at least two or three deals like Suez Environnement’s happening this year. (Reporting By Charlie Thomas)

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