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Corporates break new ground to cope with negative rates
March 3, 2017 / 1:12 PM / 8 months ago

Corporates break new ground to cope with negative rates

* Market adapts to ECB effect

* Coca-Cola and Pfizer to trigger more supply

* Investors guard against political risk

By Laura Benitez

LONDON, March 3 (IFR) - Coca-Cola and Pfizer broke new ground in the European corporate market this week, pricing the first above par floating-rate notes as the sector adapts to the deeply negative rates sparked by eurozone monetary policy.

Coca-Cola priced its FRN on Monday with Pfizer following on Wednesday, in what could trigger a new market trend, bankers say. “This is the first time we’ve seen an above par pricing on a public corporate deal, and it’s been done by Coca-Cola and Pfizer in a very visible way. It’s a game-changer and it could unlock a reasonable amount of floating-rate supply with above par pricing features,” said Marco Baldini, head of European bond syndicate at Barclays.

Pfizer’s €1.25bn two-year floater priced at a cash price of 100.35 with a three-month Euribor plus 20bp coupon floored at a 0%, which rules out investors having to make payments to the issuer.

Similarly, Coca-Cola printed a €1.5bn two-year at a cash price of 100.30, with a floored 0% coupon, at three-month Euribor plus 25bp.

In October last year, Danone left over €4m on the table when it priced a €1.35bn two-year floater at a margin significantly higher than the market rate required.

The French yoghurt maker printed the FRN with a coupon of three-month Euribor plus 15bp, but at a 100 cash price. Given a deeply negative three-month rate, the bond jumped 30 ticks when freed to trade.

The securitisation and SSA sectors have long adapted to the complexities created by negative rates, pricing bonds at a premium to par to prevent borrowers losing out.

“[The corporate market] has been completely untested,” a lead on the Coca-Cola deal said.

“Feedback from lots of accounts has previously been negative when faced with above par pricing. But sentiment has completely changed recently, driven partly by the complete lack of regular supply and investors focusing on the shorter end.”

ON THE DEFENSIVE

Despite Coca-Cola and Pfizer’s 0% floored coupons offering little if any return at all, demand for the paper sky-rocketed, demonstrating how investors are shielding their portfolios ahead of looming political risk.

Investors threw €3.75bn of orders at Pfizer’s €1.25bn floater, while Coca-Cola’s €1.5bn drew a whopping €4bn of demand.

“Investors are seeing floaters as super-defensive instruments to put money in, considering the political uncertainly in Europe right now. We’re seeing a number of accounts voicing their concerns around this risk, and floaters are attractive investments,” Baldini said.

Mounting concerns over political risk, namely the French presidential election, and poor valuations have began to weigh on investors’ minds, forcing many to ‘park cash’ in safer assets until the market finds some clarity.

LURED OVER

Cross-border borrowers have flooded the European market in recent years, attracted not just by the low coupons but also the diversification and off-the-run tenors it can offer.

Pfizer, rated, A1/AA, returned to the market this week after an eight-year absence to raise €4bn across two, three, five and 10-year tranches.

The deal’s proceeds will be used partly to repay the approximately US$6.6bn of commercial paper the borrower has outstanding.

Coca-Cola, rated Aa3/AA- (stable/negative) printed a €2.5bn three-tranche transaction across two, four and seven-year tenors, largely to refinance a €2bn bond maturing in March this year. (Reporting By Laura Benitez, editing by Alex Chambers and Phillip Wright)

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