Last week ended without any corporate bond issue in Europe and many bankers in the market were sceptical that any would emerge for weeks. But some optimists insisted conditions were improving, and they were vindicated on Monday when SSE, the UK electricity company, brought an expected €500m green bond that was an unquestioned hit.
SSE (formerly Scottish and Southern Energy) had issued once before this year — a €1bn hybrid on April 12 that was the last corporate hybrid to be completed. Recently, even senior new issues have become rare.
This time, the Baa1/BBB+ rated company went for a structure very easy on investors — a €500m seven year green bond.
Bank of China, Barclays, Lloyds, NatWest Markets and Santander set initial price thoughts at 155bp over mid-swaps.
“It was a great transaction,” said a debt capital markets banker on the deal. “Secondaries were tightening in the last few weeks, and showed there is demand for the right credit. It was very clear that investors want to add some risk. This transaction is green, it’s a very strong credit. The question is: do you wait for a very busy time in [late] August or September, or go now and be first?”
SSE knew it had made the right decision by 11.30 London time, when the leads announced a €3.8bn book. The deal was increased to €650m and tightened to 130bp, and was set to go subject at 11.55.
The book closed at €5.75bn, nearly nine times the increased deal, so the bookrunners tightened to 120bp. The final reconciled book was €5.6bn.
This was possible even on a day when UK and European equities opened down. It bears out the argument made by Giulio Baratta, head of investment grade finance, debt capital markets at BNP Paribas, to GlobalCapital last week, that investors were seeing valuations as attractive again and there could be opportunistic issuance this week, “starting with blue chips and then more granular names”.
A head of syndicate away from SSE’s deal said it showed that: “There is interest and no buyer’s strike from investors.”
He, like the banker on the deal, put the new issue premium at about 5bp. Oddly, although there have been no new corporate new issues for 10 calendar days, the last one, PepsiCo’s seven and 12 year in sterling, was also a resounding success, with NIPs of 5bp and 2bp.
Despite SSE’s encouraging result, the banker away from the deal was downbeat about the prospects for more issuance.
“The market is there to do trades and deliver decent outcomes,” he said, “but it should be the right name and sector, non-controversial. I don’t mind if it’s green or not, it’s probably not a key thing for success, but it adds additional positives.”
However, the energy company with real power to move the market is not SSE but Gazprom.
Spreads generally had tightened since Wednesday when the Russian gas company resumed pumping gas to Germany through the Nord Stream 1 pipeline at the same rate — 40% of capacity — that it had supplied before a 10 day maintenance shutdown.
But on Monday Gazprom said it would cut the flow to 20%, starting on Wednesday, because it needed to switch off one of the turbines.
“As swiftly as the market cheered up with news that gas was flowing through the pipeline, this news has sent the stockmarket from positive into negative territory,” the banker said. “That tells me how swiftly things can change — and this is just one headline.”
After that, he would be wary of encouraging issuers to come to market before Wednesday’s Federal Open Market Committee meeting, when market participants will be agog to see whether the Fed raises rates by 75bp or 100bp and whether it can find any encouraging words to say about the economy.
The banker summed up gloomily: “My outlook for the next couple of days has darkened.”