Money Managers Fight for Slice of Europe Company Bond SupplyBy
Some investors being allocated 10 percent of their order
PSA Banque France saw orders ten times the size of its deal
When auto finance company PSA Banque France SA said it was selling 500 million euros ($534 million) of bonds last week, Frankfurt fund manager Alexander Barth liked what he saw and placed an order.
Unfortunately for him, many of his competitors had the same idea. The bond attracted bids for 10 times what was on sale and the interest the company was offering on the debt fell precipitously, prompting Barth, who helps manage 20 billion euros in corporate bonds at Union Investment Privatfonds GmbH, to walk away.
"We decided to leave the books due to the massive cutback of the reoffer spread," he said. “We are seeing unusually strong demand for euro credit new issues.”
His experience is common among European bond managers at the start of 2017. Asset buying by the European Central Bank to stimulate the region’s economy and rising redemptions this year are contributing to a relative shortage of corporate debt supply.
As a result, fund managers looking to buy new securities are often being left disappointed. Those that do place successful bids sometimes only get a quarter of the bonds they order, if they’re lucky. In some deals they may only see 10 percent, according to Barth, who said money managers can typically expect about 35 percent under normal conditions, and in some cases a full allocation.
Such buoyant demand means pricing on euro non-financial high-grade bonds this year has tightened an average 16.2 basis points during bookbuilding, data compiled by Bloomberg show.
PSA’s transaction went for 68 basis points over midswaps, having narrowed from an initial offer of 85 to 90 basis points. A six-year sale by French autoparts maker Valeo SA, which was more than five times subscribed, tightened to 48 basis points from about 70. HeidelbergCement AG, raised by three credit-ratings firms to investment grade in November, sold 750 million euros of notes last week at 55 basis points over midswaps, down from initial talk of about 80 basis points. Final orders for its deal totaled 3.1 billion euros but demand reached as much as 4.5 billion euros earlier in the sale process, according to two people familiar with the transaction.
Issuers are responding to investor demand that’s skewed the market in their favor. Sales of non-financial high-grade bonds in the common currency reached 16.6 billion euros in the first two weeks of the year, compared to 4.5 billion euros for the whole of January 2016, according to Bloomberg data, amid China’s stocks selloff and a global commodities rout at the start of last year.
Yesterday’s 2.6 billion-euro four-tranche transaction from Fresenius SE & Co. KGaA attracted 12 billion euros of orders. Nearly three-quarters of that demand was for its two shortest-dated bonds offered, including one due in five years.
Shorter-duration bonds due in three to five years are most in demand, said Alexandra Van Gyseghem, who oversees about 30 billion euros in investment-grade euro fixed income at Amundi SA in Paris. PSA’s bond has a three-year maturity while HeidelbergCement redeems in four years. The share of deals maturing in less than five years has nudged up to 22 percent of January’s total issuance compared to 16 percent for 2016, Bloomberg data show.
“European credit is a good place to be in 2017,” Van Gyseghem said.