Fri Jan 17, 2014 6:43am EST
<span id="articleText"/>* Triple B peripheral names are top investor picks
<span id="midArticle_0"/>* Strategists call corporate bond yields "unnervingly low"
<span id="midArticle_1"/>* Investors demand longer maturities
<span id="midArticle_2"/>* Hybrids offer key competition for senior paper
<span id="midArticle_3"/>By Josie Cox
<span id="midArticle_4"/>LONDON, Jan 17 (IFR) - High-quality European corporate credits will be forced to offer juicier premiums and longer maturities on new bonds in order to compete with higher yields available from weaker names.
<span id="midArticle_5"/>With many investors preferring to chase returns by going down the credit spectrum, better rated issuers are finding it increasingly challenging.
<span id="midArticle_6"/>"The problem is that we're in a very risk-on environment at the moment," said Markus Steilen, syndicate manager at Commerzbank in Frankfurt.
<span id="midArticle_7"/>"Investors aren't seeking exposure to the safest possible names, because they're simply comfortable with more risk so that they can secure a higher yield."
<span id="midArticle_8"/>European strategists too, are steering investors away from names rated single A and higher, feeling that the yields on offer are too low - and likely to keep falling.
<span id="midArticle_9"/>"We recommend keeping minimum exposure to low-beta names, and loading up in high-beta and high-yield as much as feasibly possible," said Societe Generale strategists Suki Mann and Juan Valencia.
<span id="midArticle_10"/>With the iTraxx Main index now at 70bp - close to a more than three-year low, and 40% tighter than this time last year - they say current corporate yields are "unnervingly low".
<span id="midArticle_11"/><span id="midArticle_12"/>SECONDARY WEAKNESS
<span id="midArticle_13"/>The somewhat lacklustre performance of recent bonds in the secondary market has underscored these difficulties facing higher-rated borrowers.
<span id="midArticle_14"/>Some of the deals for German automakers and chemicals group BASF traded as much as 5bp wider over mid-swaps on the break.
<span id="midArticle_15"/>"BMW's bonds, for example, had a decent enough new-issue premium but a very low underlying yield," said Jens Vanbrabant, lead portfolio manager at ECM Asset Management. "As a result the bonds widened."
<span id="midArticle_0"/>Meanwhile investors are being lured by the plentiful supply of alternative paper on offer further down the ratings spectrum from subordinated, hybrid bonds as well as in the senior sector.
<span id="midArticle_1"/>Names like Valeo, APRR and ASF all managed to generate vigorous demand over the past fortnight, with new issues trading as much as 5-6bp tighter in the secondary.
<span id="midArticle_2"/>On Tuesday, Enel spin-off Snam printed EUR600m of 10-year bonds at mid-swaps plus 128bp that subsequently tightened by as much as 6bp despite offering just a 4bp premium. Order books topped EUR1.7bn.
<span id="midArticle_3"/>On Thursday, Telecom Italia printed its first bond as a junk-rated corporate - a EUR1bn seven-year offering that attracted a massive book of more than EUR7bn, while French investment company Wendel, rated BB+ by S&P, on Tuesday attracted a 7.5-times subscribed book on its EUR400m seven-year trade.
<span id="midArticle_4"/>Leads said this chunky order book was down, at least in part, to a substantial bid from traditional high-grade buyers.
<span id="midArticle_5"/>HYBRID APPEAL
<span id="midArticle_6"/>Many investors have said that the subordinated format has presented a perfect opportunity to gain access to some very attractive names while also ensuring spread.
<span id="midArticle_7"/>One London-based asset manager said he had bought EDF's triple-currency hybrids, for example, because French state ownership means the risk of default or coupon deferral looks very low.
<span id="midArticle_8"/>"At the same time, the hybrid is just so much more attractive than senior because yields have come in too much."
<span id="midArticle_9"/>In 2013, hybrids returned over 6% compared with the relatively paltry 2.5% from senior investment corporate credit - and some credit strategists are forecasting that those returns could be even lower if yields continue their journey south.
<span id="midArticle_10"/>The average maturity for euro investment-grade senior corporate paper in 2013 was just over seven years. So far this year is at 7.4 years. And, as yields dwindle, many in the market say this is simply not enough.
<span id="midArticle_11"/>"Slapping a 10bp premium on is immediately going to make a bond look more attractive," one origination official said.
<span id="midArticle_12"/>"But to ensure no unnecessary money is left on the table, corporates should be looking at maturities above the seven or eight year mark," one origination official said. (Reporting By Josie Cox)
<span id="midArticle_13"/>
<span id="articleText"/>* Triple B peripheral names are top investor picks
<span id="midArticle_0"/>* Strategists call corporate bond yields "unnervingly low"
<span id="midArticle_1"/>* Investors demand longer maturities
<span id="midArticle_2"/>* Hybrids offer key competition for senior paper
<span id="midArticle_3"/>By Josie Cox
<span id="midArticle_4"/>LONDON, Jan 17 (IFR) - High-quality European corporate credits will be forced to offer juicier premiums and longer maturities on new bonds in order to compete with higher yields available from weaker names.
<span id="midArticle_5"/>With many investors preferring to chase returns by going down the credit spectrum, better rated issuers are finding it increasingly challenging.
<span id="midArticle_6"/>"The problem is that we're in a very risk-on environment at the moment," said Markus Steilen, syndicate manager at Commerzbank in Frankfurt.
<span id="midArticle_7"/>"Investors aren't seeking exposure to the safest possible names, because they're simply comfortable with more risk so that they can secure a higher yield."
<span id="midArticle_8"/>European strategists too, are steering investors away from names rated single A and higher, feeling that the yields on offer are too low - and likely to keep falling.
<span id="midArticle_9"/>"We recommend keeping minimum exposure to low-beta names, and loading up in high-beta and high-yield as much as feasibly possible," said Societe Generale strategists Suki Mann and Juan Valencia.
<span id="midArticle_10"/>With the iTraxx Main index now at 70bp - close to a more than three-year low, and 40% tighter than this time last year - they say current corporate yields are "unnervingly low".
<span id="midArticle_11"/><span id="midArticle_12"/>SECONDARY WEAKNESS
<span id="midArticle_13"/>The somewhat lacklustre performance of recent bonds in the secondary market has underscored these difficulties facing higher-rated borrowers.
<span id="midArticle_14"/>Some of the deals for German automakers and chemicals group BASF traded as much as 5bp wider over mid-swaps on the break.
<span id="midArticle_15"/>"BMW's bonds, for example, had a decent enough new-issue premium but a very low underlying yield," said Jens Vanbrabant, lead portfolio manager at ECM Asset Management. "As a result the bonds widened."
<span id="midArticle_0"/>Meanwhile investors are being lured by the plentiful supply of alternative paper on offer further down the ratings spectrum from subordinated, hybrid bonds as well as in the senior sector.
<span id="midArticle_1"/>Names like Valeo, APRR and ASF all managed to generate vigorous demand over the past fortnight, with new issues trading as much as 5-6bp tighter in the secondary.
<span id="midArticle_2"/>On Tuesday, Enel spin-off Snam printed EUR600m of 10-year bonds at mid-swaps plus 128bp that subsequently tightened by as much as 6bp despite offering just a 4bp premium. Order books topped EUR1.7bn.
<span id="midArticle_3"/>On Thursday, Telecom Italia printed its first bond as a junk-rated corporate - a EUR1bn seven-year offering that attracted a massive book of more than EUR7bn, while French investment company Wendel, rated BB+ by S&P, on Tuesday attracted a 7.5-times subscribed book on its EUR400m seven-year trade.
<span id="midArticle_4"/>Leads said this chunky order book was down, at least in part, to a substantial bid from traditional high-grade buyers.
<span id="midArticle_5"/>HYBRID APPEAL
<span id="midArticle_6"/>Many investors have said that the subordinated format has presented a perfect opportunity to gain access to some very attractive names while also ensuring spread.
<span id="midArticle_7"/>One London-based asset manager said he had bought EDF's triple-currency hybrids, for example, because French state ownership means the risk of default or coupon deferral looks very low.
<span id="midArticle_8"/>"At the same time, the hybrid is just so much more attractive than senior because yields have come in too much."
<span id="midArticle_9"/>In 2013, hybrids returned over 6% compared with the relatively paltry 2.5% from senior investment corporate credit - and some credit strategists are forecasting that those returns could be even lower if yields continue their journey south.
<span id="midArticle_10"/>The average maturity for euro investment-grade senior corporate paper in 2013 was just over seven years. So far this year is at 7.4 years. And, as yields dwindle, many in the market say this is simply not enough.
<span id="midArticle_11"/>"Slapping a 10bp premium on is immediately going to make a bond look more attractive," one origination official said.
<span id="midArticle_12"/>"But to ensure no unnecessary money is left on the table, corporates should be looking at maturities above the seven or eight year mark," one origination official said. (Reporting By Josie Cox)
<span id="midArticle_13"/>
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