January 22, 2013 7:29 pm

EDF sets hybrid bond issue record

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EDF borrowed about €4bn in the world’s largest ever hybrid bond issuance on Tuesday, taking advantage of strong investor demand for higher yielding assets.

Hybrid bonds fall lower in the capital structure than conventional bonds, meaning investors are more likely to lose money in the event of a default. But they come with a higher return that can look attractive, particularly in this low interest rate environment.

The state-controlled French utility managed to tap into that and issued two euro tranches worth a total €2.5bn as well as a sterling tranche of £1.25bn. The deal was nearly four times subscribed, said bankers involved.

“EDF is a good credit and everyone knows the name, but there is also a lot of money coming into credit at the moment as investors put their money to work, which really helps,” said Jean-Marc Mercier, global head of debt syndication at HSBC.

Demand came mostly from European institutions, but a benchmark dollar add-on of more than $1bn expected later this week is likely to attract more Asian money, according to those involved.

The bumper EDF deal follows a €1bn and £400m hybrid issuance from Veolia Environnement, the French waste and water management company, earlier this month and is another sign of a strong start to the market in 2013.

Last year already saw a record $33bn of hybrid issuance, nearly twice the $18bn of the year before, according to Dealogic, after a late surge at the end of 2012 following a European Central Bank pledge to do “whatever it takes” to save the eurozone.

“We are in the sweet spot for both issuers and investors,” said Marcus Hiseman, head of corporate debt capital markets in Europe at Morgan Stanley. “Hybrids are valuable for companies trying to maintain their ratings as well as yield-seeking investors.”

The previous record for a corporate hybrid bond before EDF was a $3.2bn deal by General Electric in 2007, followed closely by a $2.5bn deal by Siemens in 2006. The largest European deal since the financial crisis was a $2.3bn RWE deal in 2010.

While the EDF issuance was the biggest corporate hybrid of all time, there have been bigger financial deals. Industrial & Commercial Bank of China and the Agricultural Bank of China both issued $8bn of hybrid debt in 2011.

Hybrids can be attractive for issuers as rating agencies count some types of the hybrid debt as part-equity. This may help support a company’s credit rating, while the cost will be lower than equity financing.

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