Swedish property company Fastighets AB Balder approached European primary markets with euro and Swedish krona hybrid bonds on Tuesday, but only the former tranche made it over the line following the lack of price progression on the latter.
The deal was an opportunistic bid by the issuer to take on more hybrid capital in the context of a persistent hunt for yield among investors in corporate credit, said bankers.
A syndicate official said the company's credit metrics mean it has leeway from a ratings perspective to issue hybrid capital.
“They have capacity with agencies and view the current environment as favourable and opportunistic, so they were adding hybrid capital here like many others have done as well,” said the syndicate official.
Having engaged with investors on Monday, Danske Bank, Deutsche Bank, Nordea and SEB on Tuesday announced an expected €500m 60.25NC5.25 bond at IPTs of 3.25% area, alongside a floating-rate Swedish krona tranche that came without IPTs.
After sending out a price guidance message of three-month Stibor plus 335bp–345bp (WPIR), and still committed to a benchmark size, leads later announced that the krona tranche had been pulled.
“It came down to price. They didn’t have to do it at a price they didn’t like,” said a second banker.
“Overall, the euros went well. Of course, a sub-investment-grade real estate hybrid is not going to get a book of €3bn and there has been a lot of supply in the sector recently.”
Pricing on the euro tranche was brought in to 2.875%, flat to or through fair value, based on several bankers’ estimates. Fair value was placed from 2.875% to 3%. The book peaked at over €1bn.
“At the very least it was flat, but I would be inclined to see it as through. If you look at Akelius as a comp, their senior/sub spread suggests that [Balder] should have a senior/sub spread of about 200bp,” said the second banker.
“But Akelius is always a bit tighter because there is an expectation that their hybrids will become investment-grade, so I think Balder’s spread should be more like 225bp.”
Akelius was highlighted as a key comparable by several bankers involved in the transaction. The Swedish residential property company is rated BBB (stable) by S&P at a senior level and BB+ for its hybrid bonds. Balder carries the same ratings from the same agency.
Bankers added that bringing euro and krona tranches side by side may have brought into sharp relief the relative pricing advantages of one tranche over the other.
“The dynamics are a bit different in the two markets," said a third banker, not involved in the deal. "The euro market is currently supporting some really quite tight pricing, whereas it’s not quite as clear in the Swedish market. Then, when you have such a direct comparison between two tranches, you can probably see one is less attractive."