U.S. PP Pushes Past Economic Fears of First Half
July 14, 2010
During the first six months of 2010, the private placement market acted quite the opposite of equity markets… for the most part. While other markets still feel the pressure of lingering economic concerns, the private bond market has been able to shrug these off.
Granted, the private placement market did have a wobbly start. During January and February, deal flow came in a trickle. March saved the first quarter by bringing in more than 15 deals resulting in $4.5 billion in issuance. And this increase in volume set the pace for the second quarter, which remained steady.
In excess of $17 billion was raised in the first half, far surpassing issuance for the last two years (see chart). The first half of 2008 saw more transactions, but that may just be testament to the large deals that have been done this year.
In recent months, global markets have had to deal with fears of a European sovereign debt crisis, renewed concerns about a double-dip recession and high unemployment. Despite this instability, the U.S. private placement market has continued to attracted issuers, and buysiders say they have money to spend. Sources say this pattern shows the strength and depth of the private bond market.
With the eurobond market spotty since the spring, more issuers now have to consider the private placement option, sellsiders at European banks say. At the beginning of the year, when issuance in the latter was low, the eurobond market was a popular choice and a competitor to the U.S. private bond market. But now, sellsiders say, inquiries into private placement from companies that were considering a eurobond offers are on the rise. French market research company Ipsos, for example, which was initially considering a eurobond deal, has launched a $150 million private placement deal instead. The transaction is expected to circle on Wednesday.
And Ipsos is in good company. A day after the ‘flash crash’ of May 6, JPMorgan Securities priced a $725 million deal for Dutch brewer Heineken. Due to extreme volatility in Treasury rates, the transaction was priced to a 4.60% coupon and was upsized from $200 million on the cover. Several sell-side sources pointed to this deal, with its dramatic upsize and single tranche, as an example of what this market was capable of.
Heineken was not the only company to dramatically upsize its bond issue. There were quite a few issuers who did the same during the first half of the year. In May, JPMorgan priced a $575 million deal for the National Basketball Association (NBA), which was upsized from $200 million. Earlier on, Canadian issuer Agnico Eagle Miles, via Bank of America Merrill Lynch and Barclays Capital, and U.K. issuer Meggitt, via RBS Securities and BAML, each launched deals for $200 million that were ultimately priced at $600 million.
But this trend seems more watered down over the last month. U.K-based Whitbread and Irish pharmaceutical company United Drug both had $100 million on the cover. They came away with $150 million and $130 million, respectively. Canadian auto-parts maker Linamar launched with $150 million but priced a $130 million transaction.
Delayed draws also proved popular during 2010’s first six months. With Treasury rates at all time lows, issuers took advantage of this by doing deals and deferring payment for a few months. BAML and RBS worked in a 6-month delay for Meggitt in one $150 million 10-year tranche which priced at 140 bps above Treasurys. Australia’s United Energy Distribution’s transaction, which priced at 180 above Treasurys, featured a five-month delay which cost approximately 25 bps, via BAML and JPMorgan. Even lower credit quality issuers and deals that got done with wider spreads were able to take advantage of the low rates. In May, Citigroup priced a $165 million private placement for Nassau Airport (Lynden Pindling International Airport), a BBB- credit rating, for a 7% quarterly paid coupon. The price talk on this deal was between 300 bps and 325 bps and the payment is deferred until November.
The airport sector, along with sports and entertainment, found favor during the first half. After receiving interest in excess of $500 million, Copenhagen Airport decided to tap the market for $280 million. This set the ball in motion, and Nassau Airport launched its deal soon after. BAML and National Australia Bank will soon bring Melbourne Airport to market, according to various sources. And Brisbane Airport is planning to issue private bonds later in the year, with Adelaide Airport expected to follow.
The sports and entertainment sector brought in more than $1.7 billion in the first half, with deals from National Football League, the NBA and Giants Stadium.
Judging from the inquiries they’ve received, agents predict a robust second half as well. Buysiders continue to say their appetites have not been satisfied, and they have more funds to deploy. However, some sources on the buy side note that issuance will not reach record levels until the overall economy fully recovers.
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