Case study

A Day in the Life

by Professor Ian H. Giddy
New York University

Life goes on in the international bond market, according to the attached example of the daily report on the primary market as reported in the London Financial Times. But how many of the bonds that were brought to market on this day September 2001 were ordinary, "plain vanilla" deals? Examine each of the issues, taking into account any associated commentary and footnotes, and try to identify in each case (1) what the investor is getting, (2) the effective cost to the issuer, and (3) what the underwriting banks are getting. Pay particular attention to reasons for the differences in coupons between different issues. Which of these deals would you describe as "structured financing," and why?

Eurobond Market Buoyed by Asset-Backed and Targeted Deals

LONDON. THE PRIMARY MARKET was busy yesterday as several specially structured issues were placed and a quarter-billion deal backed by cellular phone receivables met a warm reception in a cold climate.

The latter was a $250 million issue brought by JP Morgan Chase SSB for Los Angeles-based Celworks Trust 2001-1, a special purpose vehicle for the securitization of receivables for cellular telephones serviced by Cellular Network Inc. The issue had been extensively marketed by a large syndicate of banks in Europe and in Asia.

Demand was heavy, with traders reporting strong speculative interest from investors who believed the deal would see even stronger interest in Japan. As a result the spread tightened to Treasuries. JP Morgan set the offer price at 99.80, giving a spread over US Treasuries of 68 basis points. (At launch time the benchmark 7-year Treasury note was yielding 4.625%.)

Having been fully placed, the issue was quickly freed to trade and rose to 99.85 bid. The issuer was said to have swapped half the proceeds into floating rate US dollars to achieve an attractive sub-Libor funding rate.

The Eurobond market also managed to absorb a $200m Japanese warrant deal, one of the largest of its kind since the plunge of the Tokyo stock market. Nomura, the lead manager, reportedly placed the bulk of the deal back in Japan.

Merrill Lynch brought a $100 million convertible deal for Battle Mountaingold to a lukewarm reception given today's weakness in the price of gold. The borrower is a US gold producer with interests in Australia and Papua New Guinea.

The par-priced bond were trading at 99 1/8 bid among fair demand from Swiss institutions and gold funds based in France. A Merrill official said that the paper was one of the few gold instruments that carried a good yield in addition to upside potential.

Credit Suisse First Boston was the lead manager of a €150m three-year bond for Holderbank Inc., the Swiss cement concern. The bonds offered a 6 1/8 per cent coupon, and were snapped up by eager Swiss investors.

CSFB was quoting the paper at 100 1/8 bid before the European governments market backed off, when the price moved to 99 7/8 bid, still very comfortably inside the 0.22 per cent full underwriting fees. Traders opined that the terms were very generous, and speculated that Holderbank might even have been able to borrow the funds more cheaply by going direct to the banks for a loan. "It's a gift," said one official.

Also in the Euro sector, Credit Commercial de France was the lead manager of a fungible €750m deal for SNCF, the state railway authority. Combined with the already outstanding €2bn of bonds, the deal produced the largest recent Euro-denominated issue on the Eurobond market.

The new paper gave little away to investors, with pricing at 37 basis points over French Governments putting it in line with the trading level of the outstanding bonds. CCF said that the issue was trading slightly outside fees, at less 1/8 bid.

Cofiroute, a French road management company that builds and maintains motorways, issued a €300m 15-year bond priced at 38 basis points over swaps. The company is rated AA- and draws its revenues from motorway tolls. With such issuers "you always know what your cash-flow is going to be," said a spokesman for BNP Paribas, a lead manager in the deal. "It is a safe but unusual name in the market and it attracted a lot of French pension funds and insurance companies." Only 20% was sold outside France. BNP Paribas is also marketing a dual currency deal from Schlumberger, an oil drilling equipment company. The deal would comprise €1.4bn and GBP500m and could come to the market as early as next week.

An unusual 100mn kroon deal for Tallinn-based Hansabank traded around full fees, and was in demand from German as well as French funds. Proceeds were swapped into floating-rate US dollars. The Estonian kroon is linked to the Euro.

In a new product aimed at high net worth Asian investors and institutions, Credit Agricole Indosuez and Momentum, the US-based fund house, have teamed up to launch a capital-guaranteed note tied to hedge fund performance. This structured note assures investors 100 percent of the initial investment at maturity, plus an option on a selection of Momentum's fund of hedge funds.

Fuqua Industries, a US consumer products group, announced in Switzerland a partial buy-back offer on its Sfr100m 6 per cent deal issued by UBS Warburg in 1999. The borrower said it is willing to buy up to Sfr30m of the deal at 82 per cent plus accrued interest. Before the offer, which is open until tomorrow, the paper was trading at around 76 points.

September 2001
Borrower Amount m. Coupon % Price Maturity Moodys/S&P
Fees Bookrunner
Celworks Trust 2001-1 (a) US$250 4 3/8 99.80 Mar 2008 Aaa/AAA 0.30 Salomon
Marui Corp* US$200 3/8 100 Sep 2005 A3/A- 1.75 Nomura
Battle Mountaingold** US$100 5 1/2 100 Sep 2016 Ba2/BB- 2.125 Merrill Lynch
ING Groep NV (S) €600 6 1/2 100 undated A1/A - ING Barings-BBL
Holderbank €150 6.125 100.125 Dec 2004 Aa3/AA- 0.22 CSFB
SNCF (b,c) €750 4 1/2 98.55 Nov 2007 Aa1/AAA 0.07 CCF
Cofiroute €300 5.875 99.11R Oct 2016 -/AA- 0.40 BNP Paribas
Hansabank *** EEK100 7.625 101 3/8 Sep 2004 Aa2/AA 0.35 Deutsche
C. Agricole Indosuez (d) *** A$15 0 100 3/4 Mar 2003 -/- 0.75 CAI, HSBC
Final terms. *With equity warrants. **Convertible. ***Private placement. (a) Callable at par after 5 years. If call not exercised, bond pays 50bp over Libor in last year. (b) Fungible with €2bn. (c) Long first coupon. (d) Redemption linked to hedge fund performance. Unlisted. (S) Subordinated. | | | | contact
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