Cyclical names hit the euro high-grade corporate primary on Tuesday with well-covered transactions, despite lingering concerns around slower growth in most advanced economies next year.
All three deals, from Swiss flavours and fragrances manufacturer Givaudan, UK hospitality company InterContinental Hotels and US fast food chain McDonald’s, showed there is still ample liquidity waiting to be put to work in the investment-grade space at current yield levels.
"Higher financing costs are delaying or slowing down business investment while profitability is expected to decline given pressures on margins [...] investment-grade corporate bonds should fare better as the increase in funding costs is more manageable for IG issuers given lower overall debt levels," said Matthias Busuttil, portfolio manager for global corporate bonds at Fisch Asset Management.
"Looking at credit risk premia in the corporate bond universe, IG spreads, particularly in developed markets, appear fairly valued."
Givaudan's no-grow €500m 10-year bond even came just days after Moody's changed its outlook on the issuer to negative from stable, while affirming the Baa1 rating. The company is rated A– by S&P. "We see the company to maintain elevated shareholder distributions rather than prioritising debt reduction; as the macroeconomic outlook for 2024 remains uncertain and consumers' spending will likely remain at the weak 2023 level," Moody's wrote on November 16.
With some premium in the high single-digits to low teens on offer, the deal was more than six times covered at peak orders. The November 2033s landed at mid-swaps plus 112bp, inside the 145bp area initial price thoughts.
"The more cyclical an issuer's business is, the more determined they are that H1 could be tough, economically, whether it's going to be a mild recession or not. But what I'm impressed [with] is the demand [that these deals are receiving]," said a syndicate banker.
"We were really concerned as we came into November that spreads would widen and the market would fall apart after seeing increased supply but that didn't happen. At the end of October, many accounts were holding back in the secondary, keeping cash for primary deals to come."
Givaudan's existing 2% September 2030s and 1.625% April 2032s were bid at 75bp and 87bp, respectively, indicating a fair value for the new bonds at around 100bp–105bp. Final orders were over €2.6bn, via joint bookrunners Barclays, Bank of America, HSBC and ING.
Sub-IG steps
InterContinental Hotels raised €600m from a six-year bond that came with a one time only coupon step-up of 125bp if the bonds are downgraded below investment-grade ratings. Final terms for the November 2029s (Baa2/BBB, Moody's/S&P) were set at 138bp, inside 170bp area IPTs. A lead spotted fair value at around 125bp–130bp.
"The coupon step is nothing really special. It's consistent with its previous deals," said the lead. "There is a degree of cyclicality but [both Givaudan and IHG] are very attractive credits that are recognised as top notch names of their sector."
IHG's books grew further even after pricing tightened to the 145bp area, at guidance, to peak at over €3.1bn. Final demand exceeded €2.8bn, via active bookrunners Barclays, Bank of America, MUFG and Wells Fargo.
The issue was InterContinental Hotel's first visit to the euro market since 2020. "Their funding requirement is fairly light and the company was also impacted by Covid. The company thought now is a good time to return to the market and investors were supportive," the lead said.
The new bonds issued through IHG Finance. InterContinental Hotels Group, Six Continents and InterContinental Hotels are the guarantors.
Size covered
The least cyclical name out of the trio, McDonald’s, gained a combined final book of €5.45bn for a €2bn triple-tranche offering, consisting of four, long seven and 12-year bonds. The deal has expected ratings of Baa1/BBB+ (Moody's/S&P).
Investors pushed aside any ESG issues after recent stories that the company's UK boss admitted the fast food chain has received more than 400 complaints since July from staff, including about sexual harassment and bullying following a BBC investigation. "Does that translate to pricing? The reality is that it's a Triple B name trading like a Single A," said a DCM head.
A €550m November 2027, €700m February 2031 and €750m November 2035 launched at 65bp, 90bp and 118bp, respectively, inside IPTs the areas of 95bp, 120bp and 150bp. Final books were €1.75bn for the shortest tranche, €1.65bn for the long seven-year and €2.05bn for the longest note, via active bookrunners Goldman Sachs, HSBC, JP Morgan and UniCredit.
Bankers away from the deal said the bonds were starting around 35bp–40bp back of fair value, indicating new issue premiums at or less than 10bp.
"We continue to view McDonald's as a core hold, with the expectation of stable credit metrics in line with the current ratings profile," wrote CreditSights analysts.