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Financials

Telefonica hybrid bond connects investors with yield

* Telefonica revives untested market

* Another 10bn of hybrid supply expected

LONDON, Sept 8 (IFR) - Spain’s Telefonica offered investors some much-needed yield on Thursday marketing a hybrid bond - only the third such deal to come this year, as central bank purchases pushes more corporate bonds into negative-yielding territory.

Telefonica Europe announced initial price talk of 4.0-4.125% for a perpetual non-callable 5.5 year bond, before official guidance saw the yield cut to 3.75%-3.875%, for a 750mn-1bn maximum size as demand for the deal topped 4.75bn.

“I expected the Telefonica deal to price in the high 3% range, which for company with Brazilian and Latin American exposure tells you just how hot the market is right now,” Julian Marks, portfolio manager for Neuberger Berman’s Corporate Hybrid Fund said.

YIELD HUNT

The European Central Bank’s corporate bond buying has ground yields to all-time lows, with over 27% of euro investment-grade corporate bonds quoted at a negative yield on September 8, according to Tradeweb.

The ECB has bought more than 20bn corporate bonds since it started purchasing in the sector on June 8.

The ECB along with the Bank of England’s decision to buy corporate bonds over the summer has already crowded investors out of ‘eligible assets’, Fraser Lundie, co-head of Credit at Hermes Investment Management said.

“And top of the list of places to go for spill-over opportunities is the corporate hybrid market.”

But not all investors were drawn into the Telefonica deal today.

“We passed on going into the new deal as we feel that despite higher cash prices the existing structures offer better value,” said Alex Temple, portfolio manager at ECM, part of Wells Fargo Asset Management, which manages US$480bn.

“Despite initial cheapening in secondary the new issue is now repricing the curve tighter and given the size of the books we think momentum in the existing bonds will remain.”

BITING COSTS

Hybrids, which receive equity credit at the major rating agencies, are cast as the go-to product for bolstering balance sheets and funding M&A while defending credit ratings.

But issuers have been uncomfortable this year about the relative cost of issuance as the senior versus subordinated spread differential widened to eye-watering levels.

The difference between corporates’ senior and subordinated debt hit highs of around 500bp at the start of the year. This key metric used by borrowers to consider whether to issue hybrids is now in the 250-300bp range.

Telefonica’s 0.750% April 2022 paper for example was bid at a yield of 0.308%, according to Tradeweb at noon on Thursday, around 3% below the guidance levels on today’s hybrid.

The hybrid is expected to be rated Ba1/BB+/BB+.

FIRST CALL

Telefonica has jumped in ahead of Germany’s EnBW proposed hybrid deal. EnBW started its investor meetings for the US dollar and/or euro-denominated benchmark trade on Thursday.

“If the deal goes well we could see much more hybrid supply, so Telefonica could be wanting to beat the crowds here as demand for the product seems to be back on both the investor and issuer side,” Neuberger Berman’s Marks said.

He expects borrowers to print a further 10bn of hybrid supply this year.

This comes in stark contrast to volumes seen this year after volatility and equity criteria changes from S&P in late 2015 spooked many investors.

Just 2.5bn of corporate hybrid paper has printed this year compared to the 22bn-plus seen in 2015 over the same period.

However, the last deal in the sector came from satellite operator SES in June, which followed the first benchmark deal of the year from French oil major Total in May.

A handful of corporates are expected to re-open the hybrid market in the coming months with bankers confirming that a handful of borrowers are already mulling mandates.

Repsol and Vattenfall are expected to be next in line to issue more hybrid debt, according to several sources.

The Telefonica deal is expected to price later today via active bookrunners BNP Paribas, Bank of America Merrill Lynch, RBS, Societe Generale, and UniCredit. Passive bookrunners are Citi and Commerzbank. (Reporting By Laura Benitez; editing by Alex Chambers and Sudip Roy)

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