On Monday, UK power company SSE launched a €500 million seven-year green bond paying a coupon of 2.875% that attracted investor orders of €5.75 billion, according to bankers close to the deal, and allowed the transaction to be increased to €650 million.
It is a strong reception at a time when issuers and investors are struggling to come to terms with the repricing of credit at higher levels, which has undermined the value of portfolio holdings but may now at least allow better entry points to put on new positions.
Corporate bond new issues have become as rare as earnings upgrades.
“If you are a single-A rated corporate issuer, you’ve seen the underlying rate move up 150 basis points this year, your credit spread widen maybe 50bp and you have to pay big new issue concessions now of perhaps another 50bp,” says one banker. “Yes, funding costs are coming off extraordinarily low levels, but 200bp is a sharp rise.”
And execution risk is much higher. “We have seen more deals withdrawn in the past three months than in the previous three years,” the banker says.
Notwithstanding the current challenging market conditions, today’s new green bond has been extremely well received, and was considerably oversubscribed
While issuers adapt much faster in the US capital markets, it has taken months for European borrowers to understand that, in the absence of the European Central Bank (ECB) buying in primary through the pandemic emergency purchase programme (PEPP), they must now pay substantial new issue premiums above the wider spreads prevailing on their outstanding bonds to raise funding.
Debt capital markets bankers report that investor sentiment had improved in the run up to the ECB meeting on Thursday when the governing council raised rates for the first time in 11 years, betraying previous guidance for a 25bp move and hiking by 50bp instead.
“It has taken time, but it feels like investors are ready to take a little risk, starting with investment-grade blue chips and the SSE deal ticked all the boxes,” one source tells Euromoney. “Investors must adjust to the ECB’s absence from primary markets, but it will continue to reinvest PEPP inflows in secondary markets. And while we don’t expect funding conditions to improve any time soon, the 50bp hike and the anti-fragmentation tool were well received.”
Secondary corporate bond markets had been volatile and illiquid in mid-July as end-investors withdrew money from bond funds.
Fund managers needed cash to meet those redemptions while being reluctant to raise it from selling bonds held in their portfolios and realising losses. But those outflows eased off as the central bank finally showed some determination to fight inflation and that left fund managers with a little cash to put to work.
SSE is rated Baa1/BBB+ with a stable outlook. The technicals worked in its favour. Gregor Alexander, finance director of SSE, stated: “Notwithstanding the current challenging market conditions, today’s new green bond has been extremely well received, and was considerably oversubscribed.”
The banker says: “The level of over-subscription makes me think investors would probably buy weaker credits.”
Bigger tests
The euro deal follows strong receptions for corporate issuers in dollars last week such as IBM, whose $4 billion four-tranche deal was twice oversubscribed.
But while bankers were keen to hail these transactions as evidence that primary debt markets are open and corporate borrowers could have one last go at accessing them before August, the bigger tests will come in September.
That is when companies – which have rested on cash cushions and long average duration of liabilities established after the first Covid panic and that then renewed their bank lines during the first half of this year – will have to think more seriously about refinancing coming bond maturities.
Issuance windows may open in the morning and snap shut before the end of the day.
"We have always viewed optionality, agility and discipline as important qualities in financing,” says Alexander. “This has only been emphasized by the continued volatility in the capital markets due to rising inflation impacting on central bank plans for raising rates.”
As the German and other European governments work up their plans for energy rationing and the UK sees outbreaks of wildfires after the country’s hottest day ever recorded, it probably helps that the SSE deal was a green bond.
Proceeds are earmarked to fund renewables projects now under construction or recently completed, such as the Gordonbush Extension, Viking and Seagreen wind farms, as well as the world’s largest offshore wind farm at Dogger Bank.
SSE expects to deliver around a fifth of the UK’s target of 50GW of offshore wind by 2030 as part of plans that could see it invest £25 billion in the UK alone by the end of the decade.
