European Investors Feast at a Smorgasbord of Debt
Haddock, Fiona, Global Finance
These are portentous times for Europe's financial markets.The birth alone of a single currency was significant, although the reception, admittedly, was lukewarm. In its wake, however, came the birth of a new market-the corporate eurobond marketand the response has been unequivocal.
In the first half of this year Europe's markets were agog with anticipation. The hype soon reached fever pitch. The financial pages were overflowing with news of the latest jumbo offering. Issuers were doling out corporate debt by the bucket load, and investors' appetites appeared insatiable.
As bigger and better issues appeared on the horizon, investors might even have been accused of recklessness-indulging willy-nilly in a free-for-all.
Certainly, in the highly charged climate of this fledgling market, European investors' tastes are changing. But as the recent lull in demand tends to confirm, they are also maturing.
Says Paul Hearn, managing director of J.P Morgan in London: "Investors have seen a lot of deals come up recently. They are seeing deals done in many different ways. Deals that are done in an investor-friendly and responsive manner are being well received.
This year European investors have been offered a smorgasbord of mouthwatering issues. Early on, British-American Tobacco's EUR 1.7 billion issue and French utilities and communications group Vivendi's EUR 2.85 billion convertible offering set a very smart pace.The following months, however, saw a further upsurge. Mannesmann, the German industrial and telecommunications company, and Spanish energy company Repsol took the financial world by surprise in May, both launching bonds worth about EUR 3 billion. And only weeks later Tecnost International, the funding vehicle for Olivetti, stunned all and sundry with its mammoth (15 billion bond offering.
In the first half of this year, there was about EUR 58 billion worth of bonds issued in the new currency. This compares significantly with the same period last year when there was just ES billion worth of bonds issued in the 11 European Monetary Union currencies.
In particular, high-profile, big-brand companies courted favor with investors in the first six months. This was not the sole preserve of European companies. Euro-denominated issues by North American blue chips such as McDonald's (EUR 300 million), Philip Morris (e1 billion), Xerox (EUR 300 million), and Gillette (EUR 300 million) enjoyed very strong demand.
Shaken by the August 1998 crisis, investors took a general flight to quality. The first signs of a high-yield market developing in Europe were effectively extinguished last year as the emerging markets were brought to their knees.
Nonetheless, there are indications that investors are developing a penchant for lower-rated issues-effectively taking a slide down the credit curve. According to J.P Morgan research, 42% of outstanding debt issue in the eurobond market this year was rated triple A, with 13% rated single A. Compare this with eurobond issues launched in the first quarter of 1999. Triple-A-rated issues constituted 22.4% of the sum total and single-A issues 20.3%. Meanwhile, 14.6% of all corporate eurobond issues were rated triple A and 38.5% single A.
Certainly, this cannot compare with US investors. In the United States a mere 2% of outstanding domestic bond issues were rated triple A, while 24% were rated triple B. Triple-B ratings in Europe currently sit at a meager 3%. As European investors become more comfortable with single-A credits, however, single-B credits appear set to follow-albeit at a rather circumspect pace.
Says Roberta Hosegood, associate director of Credit Suisse Asset Management in London:"The United States has an extremely deep market in corporate bonds. That culture is now coming over here. The European market is more or less following in the footsteps of the US [market] and is finally starting to take off. …