September 11, 2013 / 6:23 PM / 4 years ago

Verizon's scrapped European bond disappoints investors

* Investor hopes for large premium on euro/sterling bonds dashed

* Euro telco bonds rally on postponement news

* Bankers not involved relieved for league table reasons

By Josie Cox

LONDON, Sept 11 (IFR) - European investors were left disappointed by Verizon’s decision to scrap its euro and sterling bond issuance plans on Wednesday, having hoped the borrower would offer them juicy concessions comparable to those on the dollar notes.

Bankers had originally said that euro and sterling bonds would account for about USD5-10bn equivalent of the USD49bn debt package, but after receiving more than USD100bn orders, from over 800 investors, Verizon opted to print just dollars, avoiding expensive currency swap costs.

“I would have preferred to see euro and sterling tranches as I would likely have been able to secure more paper,” said Jens Vanbrabant a London-based portfolio manager at ECM Asset Management.

“I am very disappointed,” another investor said. “Getting euros from Verizon would have been an excellent diversification buy and considering the spread on the dollar part it would likely have offered plenty of yield.”

Speculation that the euro and sterling parts would be scrapped started brewing on Tuesday, when dollar books surpassed the USD50bn mark. But other euro telecom bonds rallied strongly when Verizon confirmed it was shelving a European deal.

AT&T’s existing 2.5% March 2023 bonds, for example, widened by 30bp - as investors pulled out to make room for Verizon paper. On the news that the European roadshow had been pulled, they snapped back by around 20bp.

“It’s a shame as I‘m sure dozens of major accounts would have been keen to buy - especially in sterling,” a third investor said.

Year-to-date, less than GBP20bn of unsecured high grade corporate bonds have printed, down around 30% on last year’s like-for-like level.

SENSIBLE OPTION

Some investors are sympathetic with Verizon’s decision to focus solely on the dollar market.

“Verizon doesn’t really have euro or sterling requirements so in terms of the hedging and swap costs, doing it all in dollars seems like the sensible option,” Chris Higham, a fund manager at Aviva in London said.

“If the deal had been smaller, Verizon may have been able to use different currencies to create some pricing tension and shave off some of the premium saving costs, but the sheer size of the deal meant that this would not have been possible in this case,” he said.

Many traditional euro and sterling investors’ disappointment was also allayed by the fact that they were allocated at least some of the US dollar bonds - if not necessarily as much as they had wanted.

“We participated in the US dollar issuance as most of our funds have a global mandate,” Tim Butcher, an Edinburgh-based fund manager at Scottish Widows said.

“And we were pleased with the allocations and initial spread tightening.”

This small group of investors, not disgruntled by the shelved transactions, was joined by several debt bankers not on the deal, who had been fearful a major euro bond would leave them disadvantaged in the bond league tables.

“The fewer deals in euros away from us, the better for our league table position,” one syndicate official said.

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