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Capital Markets

Corporate Issuers Keep It Short

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April 27, 2017

Floaters up and tenors down as MNCs await tax reform.

Bond2Bond issuance volume is at record highs but durations are getting shorter as corporates keep an eye on political issues festering in Washington, DC.

That was a market update presented to the treasurers of large cap companies attending a recent NeuGroup meeting where bank experts offered insights to corporate executives about best practices for frequent bond issuers.

About 500 discreet investment-grade borrowers accessed the US debt market last year, including some pursuing private placements, according to data presented by Marc Fratepietro, co-head of global debt capital markets at Deutsche Bank. The top five issuers, unsurprisingly, were money center banks, which each issued approximately $15 billion to $20 billion in bonds and made between 11 and 18 trips to the market.

A mere three nonbank borrowers completed at least five deals last year, two of which were captive finance companies and one a utility. Only eight nonbank issuers completed four deals, prompting Mr. Fratepietro to argue that even accessing the market twice a year constitutes a frequent issuer.

A trend so far this year is companies issuing shorter maturity debt. Some of that may stem from the increased issuance by banks, with shorter-term assets to fund. Nonbank corporates, however, are also following the trend.

“There’s no doubt some companies have been doing shorter-term funding,” Mr. Fratepietro said. “Many of those fall into the category of issuers who are waiting to see what happens with tax reform.”

One treasurer of a distribution company said his company was on hold for now. The issuer had been to market four times over the previous 18 months for strategic reasons and had planned another transaction to fund its share repurchase program. It put that deal on hold, however, as it waits to see how tax reform shapes up.

“Ever since November we’ve been in wait-and-see mode, mainly because we want to have a better read on where we should have this debt,” he said. “We have earnings but not cash outside the US, and should repatriation happen, we’ll mostly likely be issuing outside the US to fund it.” He added that as the outlook for reform becomes murkier following the failure to repeal the Affordable Care Act, “We’re quickly getting to the point where we’re likely to do something on the short side relatively soon, and we’ll revisit the whole repatriation strategy.”

Another trend so far in 2017 has been a pick up in floating-rate note (FRN) issuance.

“We’ve seen a noticeable pick up in floating-rate issuance this year; there’s definitely heightened interest in the US and Europe,” Mr. Fratepietro said, noting that demand is so high in Europe that some FRN deals are clearing with negative yields.

As frequent issuers, companies must carefully manage their investors, to meet both sides’ needs most effectively. Mr. Fratepietro noted that investors would be happiest with a single large and predictable deal each year that offers large and liquid tranches. More often than not, that’s out of sorts with the issuer’s objectives, so treasurers need to find a balance.

Timing of the deal, for example, must fall somewhere in between expected and unexpected. If a company completely surprises investors with an offering, it will probably end up paying a premium. However, if the issuer approaches the market like clockwork—utilities, for example, tend to with regularity—then investors will be tempted to lighten up on the issuer’s existing paper before the deal, to push spreads wider.

“So when thinking about cadence, issuers want a balance so they’re not overly surprising investors but neither are they too transparent,” Mr. Fratepietro said.

The treasurer of a major manufacturer said its captive finance company plans its funding trips a year in advance, aiming to fit deals into two transaction windows of two months each, due to blackout periods the rest of the year. Before entering an issuance period it knows what tenors it wants but it is willing to adjust and shift. Treasury staff may put out daily calls for a week to measure market demand, take a few days off, and then resume calls until they determine the optimal deal size and terms.

“We used to issue more frequently single-tenor tranches, and now we’re issuing in the two-month windows with multiple tranches,” he said. “Investors seem to like that a whole lot better.”

Another key consideration is deal size. Investors’ preference for large transactions stems from the lack of liquidity in today’s bond market, in the wake of Dodd-Frank Act rules that prompted Wall Street firms to reduce their securities inventories. Hence issuers should gauge the minimum size necessary to appease investors when formulating their debt-issuance strategies. Mr. Fratepietro said features such as par call structures, which have been promoted aggressively by some larger money managers, can provide helpful flexibility.

Issuing multiple tranches at different points on the yield curve is also important for frequent issuers. 

“If you’re offering multiple securities, you’re likely to tap into more pockets of money, and [investors] can take those bonds and put them in more subaccounts,” Mr. Fratepietro said.

The treasurer at the manufacturer affirmed that notion, saying his team determines whether certain points on that curve are missing and may, for example, “force” themselves to do a longer tranche if a gap needs to be filled.

Selling It
Mr. Fratepietro said more companies than ever have adopted investor marketing strategies for fixed-income. They range from telephone calls the morning of a deal, although such calls can end up as rapid fire and sometimes negative-tone Q&As, to face-to-face meetings between corporate treasury and perhaps the company’s CFO and a gaggle of buyside executives. In some cases, a corporate treasurer with an afternoon free in New York may work with a bank to opportunistically schedule a small group lunch meeting with half a dozen investors as an efficient way to do some marketing.

The treasurer at the manufacturer said his team—mainly those working directly on the deals—pursue frequent non-deal marketing, and sometimes they’ll make the tour with the team members in charge of equity. Much of the information they present to investors at the meetings can be found on the company’s website, but the investors “just want to see the whites of our eyes,” he said, adding that his team had recently met up with insurance underwriters in New York and Bermuda, and it was “money well spent.”

Institutional investors in Europe are becoming much more receptive to non-deal roadshows, which regardless of region are important for frequent issuers to pursue, if only to keep their names fresh, Mr. Fratepietro said.

He added that the success of “no-story credits” centers on starting at the right price, gaining momentum, and then leveraging that momentum to the issuer’s advantage. Consequently, issuers want investors to recognize their names as soon as a deal is announced, so when a portfolio manager calls his or her research analyst, that analyst can say the company has been vetted and gives the green light.

“If the research analyst hasn’t looked at the company’s name for a bit, or is not sure whether it’s overweight or underweight in the portfolio, it’s going to slow down the order process,” Mr. Fratepietro said. “And if the order comes in later, the issuer will lose momentum.”


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