Telecom Italia is on course to print a €850m five-year senior unsecured non-call life bond on Friday, the largest of the refinancing trades seen in the euro high-yield market in months, with strong demand enabling dealers to price the debt comfortably inside initial price talk and guidance levels.
The coupon for the bond was set at 6.875% at final terms, having gone through IPTs of low 7s and guidance at 7% area.
"Investors are willing to play ball but we need a high coupon," one high-yield investor said, adding that being paid a coupon around 7% for a performing credit is fine. He also noted that recent high-yield issuance has been dominated by low tenors with call provisions, which limit the interval of time for capital appreciation as issuers can take out the debt if lower funding costs become available to them.
The announcement of IPTs dragged Telecom Italia's secondary levels wider, with the yield on its €1.25bn 2.375% October 2027s rising to 6.4% on Friday, up from 5.8% in early morning trading the day before, according to Tradeweb.
Still, analysts at CreditSights said in a note that the new deal would still offer a meaningful new issue concession of around 75bp compared to the levels where the company's debt stack traded in the secondary market at Thursday's close.
Despite Telecom Italia leaving some spread on the table for the new issue, CreditSights cautioned that investors will have more opportunities to add exposure, potentially with better visibility on the credit, throughout this year. The separation of Telecom Italia's network assets remains a thorny issue limiting upside potential, they wrote.
The deal is another positive sign for the beleaguered market which has been slow to restart compared to other fixed income asset classes. Upbeat sentiment in credit markets, fuelled by expectations of a slower pace of interest-rate rises as inflation cools, has breathed life into the euro high-yield market. Four issuers entered the market this week and participants say that plenty of other work on trades is taking place behind the scenes.
Most of these deals have been pre-marketed to minimise execution risk after a disastrous previous year, in which heightened volatility and thin liquidity made investor commitments unreliable. Investor feedback during pre-marketing is also shaping price discovery, sources said.
"Of the deals we are doing in January we expect to pre-market the vast majority of them if not every single one of them," one high-yield banker said. "Investor behaviour is quite tricky to have certainty over ... and bookrunners, underwriting banks, companies and sponsors want a higher degree of certainty over price discovery and likelihood of success for the transaction."
Like the other issuers in the market, Telecom Italia is looking to refinance short-term debt. Refinancing deals are expected to drive issuance in the coming weeks, market sources say.
Aside from debt coming due for repayment in 2023 and 2024, the borrower has a further €9.7bn coming due for repayment by the end of fiscal year 2027, including both loans and bonds, according to the investor presentation. Overall, it has €25.1bn of nominal medium-long term debt outstanding, of which fixed-rate debt makes up around 65%.
The firm's credit family and issue ratings for the senior unsecured notes are expected to remain unchanged at B+/B1/BB- from S&P, Moody's and Fitch respectively.
JP Morgan (B&D) and Goldman Sachs are global coordinators and physical bookrunners. BNP Paribas, Credit Agricole, UniCredit, SMBC and MUFG are bookrunners. Virtual meetings are available through Friday and follow a UK call on Thursday morning.
Still cautious
Italy-based Orthopaedic implant manufacturer LimaCorporate on Friday priced a €295m five-year non-call one senior secured floating-rate note, while earlier in the week, French sugar and ethanol producer Tereos effectively reopened the high-yield market printing a €350m five-year non-call two bond at a 7.25% coupon to help refinance a 4.125% June 2023 bond, callable in March.
In between, French distressed debt purchaser iQera launched a debt exchange alongside a new issue to refinance up to €570m of existing debt. The borrower is offering an up-front cash compensation of five points to entice investors to roll over the debt.
According to market participants, these deals have all been pre-marketed.
A second banker agreed with the first high-yield banker, saying that most offerings would require at least two stages, though he expects a better market reception for refinancing deals. However, he caveated that well-known names with large capital structures and a better read-across in the secondary market may access public funding directly without being pre-marketed.
"The market will be more disciplined helping issuers to push out upcoming maturities. Raising new money for LBO-related transactions will be more challenging," he said.
Updated story: Updates prices, adds investor comments