PARIS (Reuters) – European bond issuers are facing higher rates and adapting their funding methods, which has an impact on the functioning of listed debt markets, several managers explain.
On June 20, Unibail Rodamco Westfield thus preferred to exchange its existing hybrid bonds rather than buy them back in anticipation (“call”), an indication that the rise in rates is complicating the group’s financing.
When an issuer recalls its securities, it must issue new debt with coupons now higher than those of the “callable” securities.
Issuers may therefore prefer to keep their existing issues to maturity, with more favorable coupons.
Hybrid securities, however, strongly encourage issuers to trigger redemptions, because the coupons are revised upwards and the credit quality of the company is lowered if this is not the case, the part counted as being capital (equity content) of the hybrid debt issued being reclassified as debt by the rating agencies.
In the case of the exchange set up by Unibail, the group exchanged 1.15 billion euros of hybrid securities (out of 1.25 billion total) at a coupon of 2.125% against 995 million euros of hybrid securities ” callables” in 5 years and three months at a coupon of 7.25%, together with a cash redemption of 155 million euros.
The coupon is certainly higher but concerns a lower volume of debt.
The group is left with just 100 million euros of debt from the initial stock which has not been exchanged or recalled. For this debt, the coupon is recalculated at the 5-year midswap plus 167.5 bp, approximately 5%.
The loss of “equity content” now concerns debt volumes too low to have an impact on Unibail’s credit quality.
“BAD SIGNAL”
“Do not (trigger the clauses) sends a bad signal on the health of the company and increases the financing costs”, explains Vincent Marioni, head of credit investments at Allianz GI.
“As such, the exchange set up by Unibail represents a good compromise between economic calculation and investor expectations: financing costs could rise at the margin, but the company should not see any long-term impact” .
In the hybrid segment, the real estate sector, with significant financing needs complicated by high rates and a slowing market, appears to be the most at risk.
A hybrid security issued by the Swedish real estate group SBB, whose “call” date is in 2025, is thus quoted at 19 cents on par, against 82 cents for a high-yield bond security maturing in 2025 from the same issuer, according to Eikon data. compiled by Reuters.
According to managers, if Unibail had issued new securities to refinance its debt, the coupon would have been close to or even higher than 8%, reflecting concerns about the sector.
HIGH PERFORMANCE
More broadly, all high-yield securities, which incorporate this type of clause, are concerned.
“The market is integrating a lot of bad news into its prices, in particular an extension of the reimbursement of securities with option clauses whose yield at worst converges towards the yield at maturity”, confirms Philippe Berthelot, director of credit and monetary management at Ostrum. AM.
Yields at worst for securities are calculated as if the securities were redeemed at the first opportunity, while yields at maturity measure the yield of the security in a scenario where it would be redeemed at maturity.
The convergence of these two measures therefore implies that bond securities would not be redeemed at the first opportunity: the difference between the yield at worst and the yield at maturity for the ICE BofA Euro High Yield index fell to three basis points in 2023, compared to 43 basis points on average over the year 2019, according to Eikon data compiled by Reuters. “The choice of whether or not to call a high yield security is a purely economic calculation on the part of the company” , summarizes Vincent Marioni.
“Faced with the rise in rates, issuers no longer trigger early redemption clauses, and refinance in anticipation the debt with a near maturity: a third of the issues which were to mature in 2024 have thus been pre-refinanced”.
Companies thus limit the risks linked to the uncertainty of monetary policy and growth.
(Report Corentin Chapron, edited by Blandine Hénault)
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