Europe’s hybrid bond market is on track for its highest annual issuance volume since 2015 after a slow start to the year as issuers have taken advantage of easy financing conditions and strong investor demand in the third quarter, says Scope Ratings.
Companies issued hybrid bonds worth nearly EUR 21.2bn in the first nine months of the year, almost as much as EUR 22.2bn companies issued for the whole of 2018. A burst of activity in the third quarter has spilled over into the current quarter, with large new transactions from first-time hybrid issuers Deutsche Bahn and Infineon Technologies, taking year-to-date issuance to more than EUR 24bn.
Renewed corporate and investor interest in hybrid securities comes as risk premiums have continued to decline. Central banks have loosened monetary policy in response to signs of more sluggish global economic growth than was expected early in the year amid the unresolved US-China trade dispute and prolonged uncertainty surrounding Brexit.
“The recent decision by the European Central Bank to resume its bond-buying programme in a continuation of its ultra-loose monetary is likely to provide continued impetus for the hybrid market,” says Azza Chammem, analyst at Scope.
The combination of low, if not negative, interest rates and still buoyant equity markets are powerful incentives for capital-intensive companies to issue hybrid securities – subordinated bonds which blend the characteristics of debt and equity instruments – to diversify their financing mix, refinance maturing hybrid issues and finance recent or planned acquisitions.
“Europe’s hybrid market is again attracting the attention of CFOs after a lull earlier in the year when it still looked as if monetary policy in the US and Europe was becoming less accommodating, so this year we are looking at the best performance of the segment in terms of volumes since 2015,” Chammem says.
The average size of transactions has risen this year compared with 2018. Several companies have raised more than EUR1 billion from single or multiple tranches.
Refinancing hybrid bonds due for redemption in the short- to medium-term has continued to be an important source of activity. French telecom company Orange SA issued two hybrid bonds, in April and September, partly to buy back hybrids with upcoming calls in 2021 and 2022.
Companies keen to preserve borderline BBB investment-grade credit ratings remain the leading issuers, particularly those which have conducted extensive M&A. Tighter credit spreads amid falling sovereign bond yields have also lured new issuers to the hybrid market. Among the biggest deals of the year to date are:
- Deutsche Bahn issued its first-ever hybrid bond on 14 October, raising EUR 2bn through two equal tranches.
- Infineon made its market debut earlier this month by issuing a dual-tranche hybrid for a total value of EUR 1.2bn to partly refinance its proposed USD 8.7bn acquisition of Cypress Semiconductor Corp.
- Vodafone PLC, still digesting its EUR 18.4bn takeover of Liberty Global’s European assets, issued a EUR 1.7bn hybrid in April.
- Merck KGaA opted for a EUR 1.5bn dual-tranche issue in June as it financed the USD 6.5bn acquisition of Versum Materials.
“Another indication of the maturing of the European market for hybrid bonds is that companies beyond the usual issuers from capital-intensive sectors such as utilities, telecommunications and real estate are tapping the market, such as Deutsche Bahn and Infineon,” says Chammem.
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