French real estate company Carmila had to pay a significant new issue premium to cross the finish line with a €500m no-grow five-year bond on Monday.
While the trade showed that the euro high-grade corporate primary is open to a Triple B rated name in the property sector – which has been battered by higher interest rates and slower growth environment – it highlighted how borrowers have to be pragmatic about pricing.
The October 2028s landed at mid-swaps plus 218bp, indicating a concession of 60bp–70bp when referencing the secondary levels before the deal was announced on September 26. The drastic spread widening of around 25bp after the deal announcement, however, made deriving fair value an extremely subjective matter.
Carmila's 1.625% April 2029s, for example, were bid at around 165bp prior to the announcement on September 25, but the spread jumped to around 190bp the next day to only widen further through the rest of last week, according to Tradeweb. The bonds were spotted at 208bp this afternoon.
"It looks very cheap when you look at their secondary levels, but I'm sure investors were pointing at other names. The new issue premium is really down to the sector more than anything else, and the issuer got it done," said a syndicate banker.
Carmila initially planned to raise €300m–500m, though that was later changed to a capped €500m transaction in a roadshow update on Friday.
A lead had said the company is aware that it has to pay a fair price to the market to get the deal done, though there is a first-mover tax for real estate names rather than a first-mover advantage, that nobody wants to pay.
Still, Carmila (BBB, S&P) gained solid demand of final books exceeding €1.1bn, via global coordinators BNP Paribas, Credit Agricole and Societe Generale. Banco Sabadell, CIC, La Banque Postale and Natixis are active bookrunners. Initial price thoughts were 230bp–240bp.
Although elevated, the pricing levels may also come as a relief, according to ABN AMRO credit analysts. "If the new deal would land in the 5.3% area, the cost of debt would still be lower than the 7.8% discount rate used to appraise property, alleviating fears of higher cost of debt funding eating into property values," they wrote.
Carmila's bonds priced at 99.468 to yield 5.625%. The coupon was set at 5.5%.
Proceeds will be used to finance or refinance the acquisition of Galimmo SCA announced in July. If the acquisition event occurs but the issuer chooses not to use the acquisition event call option, the net proceeds will be used for general corporate purposes.
There is an acquisition event call option at 101, if Carmila has not completed the acquisition of Galimmo by end of September next year or has announced that it no longer intends to pursue the purchase of Galimmo.
Bank market remains open
There have been signs of European real estate companies returning to the public bond market, with French healthcare property Praemia Healthcare (BBB, S&P) raising €500m from a five-year sustainability bond on September 12. Carmila's bond is the first real estate supply since then, while Praemia's deal marked the first since late June, when much better-rated US issuer Realty Income (A3/A–, Moody's/S&P) raised €1.1bn from two tranches, consisting of seven and 11-year bonds.
Carmila's pricing outcome, though, could prompt borrowers to mull other options to raise funds. "Many companies have navigated bond maturities without issuing, through secured bank debt, asset sales, equity raises and bond taps. Based on the colour we have gleaned, the bank market remains very much open to the sector at reasonable terms," wrote CreditSights analysts.
Separately, Bouygues (A3/A–, Moody's/S&P) reopened two lines of its bonds due June 2027 and February 2030 to raise a combined €450m.
The French conglomerate's tap of the 1.375% 2027s, with a capped size of €250m, priced at 40bp, while a no-grow €200m of additional bonds of the 0.5% 2030s landed at 77bp. The respective guidance was 35bp–40bp and 80bp–85bp.
The new bonds take the outstanding size to €1bn for both tranches. Societe Generale was the sole bookrunner.