Continental to Raise $960 Million from First European Junk Bond in a Month

Continental AG, Europe’s second- largest auto parts supplier, will sell at least 750 million euros ($962 million) of bonds in the region’s first junk issue in a month.

Hannover, Germany-based Continental will pay less to issue the seven-year securities than it did to sell five-year bonds on July 9, after relative yields on speculative-grade securities dropped by a tenth. The new notes will be priced to yield less than 8 percent, according to two people with knowledge of the transaction, compared with the 8.75 percent yield on Continental’s 750 million euros of 2015 notes.

Continental has said it may issue as much as 4 billion euros of bonds as part of a plan to extend maturities on bank loans used to fund its acquisition of Siemens AG’s VDO unit three years ago. The company also refinanced debt in 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.

Books Open

Continental’s new bond issue will be priced and sold tomorrow, according to one of the people familiar with the matter, who declined to be identified before the transaction is completed. It will be the first junk bond sale in Europe since broadband services provider UPC Holding BV issued 640 million euros of debt due in 2020, according to data compiled by Bloomberg.

Given the yields on Continental’s existing debt, the new bonds should be priced at 7.25 percent to 7.4 percent, said Andrew Wilmont, senior portfolio manager at Axa Investment Managers, which oversees 499 million euros of assets.

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.

‘Good Liquidity’

“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.

The cost of insuring Continental’s debt from default fell on news of the bond issue, 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 61 euro cents, or 1.2 percent, to 50.30 euros as of 11:31 a.m. London time. It earlier climbed to the highest level since October 2008.

Continental hired Deutsche Bank AG, Bank of America Corp., BNP Paribas SA, Credit Agricole CIB, DZ Bank AG and HSBC Holdings Plc to manage the issue, it said in a statement today. The bonds will be sold through Conti-Gummi Finance BV Netherlands with a guarantee from the parent, according to the 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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