July 26, 2019 / 1:14 PM / 3 months ago

Worldline debt issue takes negative yields to new frontiers

* French payments company raises 600 mln euros

* Bond has yield of minus 0.96%

* Growing investor interest in burgeoning sector

By Abhinav Ramnarayan

LONDON, July 26 (Reuters) - French payments company Worldline broke new territory this week by issuing some of the most negative-yielding debt on record in Europe, showing the levels of market distortion caused by central bank stimulus.

The payments sector has been fertile ground for merger and acquisition activity over the past year and attracted growing interest from investors looking to tap into the rapid increase in the proportion of cashless transactions by consumers and businesses.

Investors will pay nearly 1% for the privilege of lending Worldline 600 million euros ($668 million), convertible into shares after seven years.

The debt will be used to repay a bridging loan related to its buyout of the remaining 36.4% stake in equensWorldline, taking advantage of the bouyant investor interest in both acquisition finance and the payments industry.

The sector has featured a number of big deals this year, including America’s Fidelity National Information Services (FIS) paying $35 billion for Worldpay in March and Fiserv Inc buying payment processor First Data Corp for $22 billion in January.

Worldline is one of the biggest European players, helping companies to accept and process cashless payments, competing with the likes of Worldpay and Nets.

“It’s a company with a great story ahead of it, but the overall rates environment is a big factor, obviously, and there have been a few negative-yielding issues already,” said one banker who managed the transaction.

“But still, minus 1% or thereabouts is significant.”

ECB STIMULUS

Bond yields across Europe have been pushed lower as the European Central Bank pumped trillions of euros into the market and put interest rates into negative territory to try to jump-start flatlining economic growth and inflation.

With European government bonds yields going deeper into negative-yielding territory, corporate bonds have followed suit. Nearly a third of the sector now has negative yields, according to data from Tradeweb.

Against this backdrop, Worldline sold 600 million euros of seven-year convertible bonds at a yield-to-maturity of minus 0.96%, with strong demand allowing it to exceed the original target of 500 million euros.

The bonds were issued at a cash price of 103.20 euros and the conversion premium — the amount by which the bond price exceeds the value of the underlying stock — was 60%, which was one of the attractions for investors, the banker said.

Because of the complexity of having a negative coupon, it is common on negative-yielding issues to sell the bonds at a cash price higher than par. This means the issuer pays back less than the amount borrowed, removing the need to figure out how to organise reverse coupon payments.

This is one of the reasons negative yields on bond issues remain a rarity and off limits to many investors.

In the corporate bond world, the likes of Deutsche Bahn have issued negative-yielding bonds in the past, and this month Merck sold three tranches of debt, the shortest of which held a negative yield.

SHARE PRICE GAINS

Investors buy into such debt partly because of the spread over benchmark German Bunds and the ECB deposit rate of minus 0.4%.

Yet they have generally avoided going too deeply negative. The minus 0.96% on the Worldline bond is well below the ECB deposit rate and German seven-year debt, which was trading at minus 0.7% on Friday.

The French company was able to achieve this partly because of the potential gains on the underlying stock, which has risen by more than 50% this year.

“It is the right company in the right sector, and convertible bond investors invest for reasons other than just yield. They look at the underlying shares as well and the implied volatility,” said an investment banker who manages such transactions but was not one of the lead managers on this deal.

He added that euro convertible bond investors have been starved of paper this year and have cash they need to deploy.

JPMorgan, BNP Paribas and Natixis were the joint global coordinators on the trade and also bookrunners along with Credit Agricole, Nomura and Societe Generale. ($1 = 0.8983 euros) (Reporting by Abhinav Ramnarayan Editing by Rachel Armstrong and David Goodman)

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