Bond Deals of the Year — Investment grade corporates: Companies choose agile tactics for a market without central banks

IBM kick-started 2023 with a rocket of a deal that spanned decades of maturities in euros and 15 year sterling, making it the well deserved deal of the year.

When the US technology company came in January for €5.1bn-equivalent, it was its biggest issue in euros since 2019 and the largest corporate euro deal for more than a year.

But what really made the trade stand out, besides its eye popping size, was the 15 year sterling component.

That tranche drew £2bn of orders, as UK pension funds and insurance companies lapped up some much needed long duration paper.

Pension funds also bought a chunk of the longer euro tranches, sparking hope that these prized buy and hold investors were returning to the investment grade corporate bond market after years of shunning its rock bottom yields during quantitative easing.

All of this happened while sentiment was sharply souring on fears of interest rate rises and when the technology sector was out of favour.

Size isn’t everything, but US pharmaceuticals company Pfizer is a deserving winner after overcoming regulatory obstacles to print the fourth largest bond issue ever, totalling $31bn.

Pfizer announced a $43bn acquisition of Seagen in March. By May, it was in the market with eight tranches as it tried to lock in the jaw-dropping amount of financing it needed before the US Federal Reserve raised rates.

And Pfizer proved that even the biggest ships can change direction at short notice. The day before it opened books, the US Federal Trade Commission brought legal action against another pharmaceuticals merger, throwing doubt on whether Pfizer’s purchase would go ahead.

To keep investors on side, Pfizer kept only the 40 year part covered by the M&A clause that said it must be repaid at 101 if the acquisition didn’t go ahead. The other bonds were raised without this clause — which meant far less protection for Pfizer, but much more for investors.

The deal was a blow-out, with $80bn of orders. The FTC has yet to give the acquisition the green light, though its European counterpart has approved it.

Nestlé pounced on an undersupplied sterling market in September to price some way through where it could price euro debt this year. The company’s ability to pick the right market at the right time made it the deal of the year in sterling.

The dual tranche transaction came at a tricky time for the market. There had been undersupply all year, but a recent burst of trades had already convinced some participants that the notoriously fickle sterling market was showing signs of exhaustion.

Nestlé proved any doubters wrong. The foods group took full advantage of the twice inverted Gilt curve to find the pockets of most demand, and priced the more popular three year tranche more than 20bp through where it could have sold the equivalent debt in euros.

The leads drummed up £2.3bn of orders. This was impressive in itself, considering Aa3/AA- rated Nestlé — which some colloquially call “The Kingdom of Nestlé” because it is as highly rated as a sovereign — pays razor-thin spreads.

Volkswagen Leasing made a top gear entry to the green bond market in September, finding ample demand for the €2bn issue, with books peaking above €7bn.

That was all the more impressive because VW Financial Services had issued in sterling only a week earlier. Other affiliated companies Traton and Porsche were also competing for investor attention this year.

The use of highly specific markets allowed the frequently funding VW Group to maintain market access, and was a reminder of why the green bond market is so highly prized by issuers.

Even though investors were feeling fatigued with the automotive sector this year, and with the VW Group in particular, Volkswagen Leasing still managed to tighten all three tranches, paying concessions of 8bp-12bp, while extending its curve by two years.

Shopping centre owner Unibail-Rodamco-Westfield sidestepped the calamity threatening to engulf real estate hybrid capital with an elegant exchange transaction that almost all investors took up.

It was a bruising year for property companies on all fronts, with spreads soaring.

URW had a call date coming in July for its €1.25bn 2.125% perpetual hybrid and did not want to upset its investors by not calling it. But it knew that a new issue to replace it would be prohibitively expensive because of how far real estate spreads had widened.

So, working with BNP Paribas, the company crafted an exchange process that had not been done in the high grade corporate market before. In June, it offered investors a chance to swap their hybrids for a new 7.25% perpetual non-call October 2028 issue, plus a slug of cash, small enough not to breach rating agency rules on reducing hybrids.

The new coupon was designed to be high enough to appease investors, but still affordable for URW, and less than what it would pay in the open market. Investors overwhelmingly liked the compromise: 92% agreed to the exchange. The rest kept their old hybrids, which have been extended.