Euro investors appear keen to buy new bonds but the problem is there is barely any supply, with just one issuer in the market across investment-grade corporate, FIG and SSA sectors for the second day in a row.
As on Wednesday, when American Honda printed a €750m October 2027 bond, the sole issuer on Thursday was also an investment-grade corporate, DS Smith. The UK packaging company printed a €1.5bn dual-tranche green bond offering that at one point was more than three times covered, though price revisions meant the final combined book was nearly €1bn off its peak.
That peak combined book was at over €4.7bn, with a slight skew to a four-year tranche over a seven-year one. Final demand, however, dropped to over €3.85bn as both the €850m July 2027s and €650m July 2030s left low single-digit concessions.
Even with small premiums, the bonds, rated BBB– by S&P, came with respective coupons of 4.375% and 4.5% and triple-digit spreads. Final terms for the 2027s and 2030s were set at mid-swaps plus 108bp and 145bp, respectively, inside initial price thoughts in the areas of 140bp and 175bp.
"DS Smith will go very well because higher-yielding stuff is still in great demand," said a syndicate head ahead of the deal's launch.
The euro high-grade market has stayed open for higher-beta transactions this year even as the US banking turmoil in March rocked broader markets and as news around specific debt-ridden companies such as UK utility Thames Water and Swedish property firm SBB has roiled sentiment at times. French telecoms company Orange, for example, printed a multiple-times-subscribed hybrid bond in April, just some two weeks after the writedown of Credit Suisse's AT1 bondholders.
"IG credit is structurally defensive, and although investors have preferred blue-chip names with stronger credit ratings, that demand has been trickling down to higher-beta trades, as we've seen in Alperia's debut bond [more recently]. But [the trickling down] is still happening very selectively," said a DCM head.
Indeed, investors have been showing a high degree of price sensitivity, with some deals going through drastic attrition in their order books as borrowers have aggressively drilled down pricing to come close to secondary levels. Franz Haniel & Cie also withdrew its plan to print a sub-benchmark five-year bond on June 30 due to different pricing expectations between the issuer and investors.
DS Smith's deal marks the company's first green bond transaction. It also comes as credit spreads grind tighter on the typical lack of new issuance over the summer break period. The average asset swap spread for euro corporate senior debt has tightened by roughly 8bp since the end of June, to about 78bp as of July 19, according to iBoxx.
Skewed to shorter tranche
Orders were slightly skewed towards the shorter four-year bond that got final demand of over €2bn, after paying a new issue concession of just 3bp, according to a lead. Books on the seven-year note exceeded €1.85bn, while the premium was also a tad higher at 5bp.
With government bond curves and swap curves inverted, there was little additional yield on offer for the 2030s for investors, though bankers said demand could start to shift more favourably towards longer-dated bonds as interest rates close in on their peak levels.
"While being underweight duration worked well for us last year, and so far this year too, it's critical not to be too short-sighted. Taking a longer-term perspective, it feels like the things that drove us to underweight duration – rising interest rates and high inflation – may start to exert less influence soon," wrote Bryn Jones, head of fixed income at Rathbones.
DS Smith made its first entry to the euro bond market in almost four years, having last tapped it in September 2019 with €600m 0.875% September 2026s. The new bonds priced via Citigroup, ING and NatWest Markets.
Proceeds will be used for green projects as well as for refinancing debt, including a concurrent any-and-all cash tender offer on its €750m 1.375% July 2024s.