Continental Raises $1.3 Billion From First European Junk Bond in a Month

Continental AG, Europe’s second- largest auto parts supplier, raised 1 billion euros ($1.3 billion) in the region’s first high-yield note issue in a month.

Continental paid less to issue the seven-year securities than it did to sell five-year bonds on July 9, after relative yields on junk debt dropped by a tenth. The Hannover, Germany- based company priced the new notes to yield 7.625 percent, compared with 8.75 percent on the 2015 notes, according to data compiled by Bloomberg.

Continental has said it may issue as much as 4 billion euros of bonds as it seeks to extend maturities on debt used to fund its acquisition of Siemens AG’s VDO unit three years ago. The company also refinanced borrowings after a 1.1 billion-euro stock sale in January, according to data compiled by Bloomberg.

“It’s a large company issuing senior secured paper and this will be very attractive to investors,” said Josep Turro, a high-yield analyst at Conduit Capital Markets Ltd. in London. July’s deal also “was very attractive and did extremely well,” he said.

Antje Lewe, a Hannover-based spokeswoman for Continental, declined to comment.

Continental’s deal is the first junk bond sale in Europe since broadband services provider UPC Holding BV issued 640 million euros of debt due in 2020, Bloomberg data show.

Narrower Spread

The extra yield investors demand to hold junk bonds in euros instead of benchmark government securities has narrowed 79 basis points to 687 basis points since Continental’s last bond issue, according to Bank of America Merrill Lynch’s Euro High- Yield Constrained Index. The average yield premium has tumbled since reaching 855 basis points on June 10, the highest since November 2009. A basis point is 0.01 percentage point.

Continental, which is majority-owned by Schaeffler Group, has more than 8 billion euros of bank loans coming due in 2012 linked to its 2007 VDO acquisition, according to Bloomberg data.

“Conti’s short-term liquidity is good, reflecting limited debt maturities for the next 12 months, a sizable cash position” and funds available under a revolving-credit facility, Moody’s Investors Service analysts wrote in a report today affirming the company’s B1 rating, four steps below investment grade.

Standard & Poor’s rates Continental at B, a step lower than Moody’s. High-yield, or junk, bonds are rated below Baa3 by Moody’s and BBB- by S&P.

Default Risk

The cost of insuring Continental’s debt from default fell, with credit-default swaps tied to the company dropping 5.5 basis points to 468, according to data provider CMA.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals an improvement in perceptions of credit quality, and a basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

Continental’s shares rose 1.53 euros, or 3.1 percent, to 50.85 euros today, the highest level since October 2008.

Deutsche Bank AG, Bank of America Corp., BNP Paribas SA, Credit Agricole CIB, DZ Bank AG and HSBC Holdings Plc managed the bond issue. The notes were sold through Conti-Gummi Finance BV Netherlands with a guarantee from the parent, according to a statement.

To contact the reporters on this story: Caroline Hyde in London at chyde3@bloomberg.net; Esteban Duarte in Madrid at eduarterubia@bloomberg.net

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