Lafarge SA and Coca-Cola Hellenic Bottling Co are among companies in Europe seeking to lock in borrowing costs near their lowest in more than seven years by exchanging existing bonds for new debt with longer maturities.
Lafarge is asking investors to swap 1 billion euros (US$1.2 billion) of bonds due 2008 for new securities maturing in 2014.
Coca-Cola HBC wants to buy back 555 million euros (US$666 million) of debt due in 2006 and issue new bonds with an unspecified longer maturity.
Companies are seeking to extend maturities on their debt before borrowing costs rise in Europe, said investors such as Guillaume Bucaille, head of credit research at Pictet Asset Management in Geneva. Average yields on European corporate bonds were about 3.9 per cent early this month, near June 2003's low of 3.3 per cent, according to Merrill Lynch & Co's EMU Corporate Index.
Lafarge's offer is "a wise move given the dearth of new issues," said Bucaille. "There is little alternative for investors other than to accept the tender," if they want to continue holding Lafarge debt. Pictet manages 1 billion euros (US$1.2 billion) of corporate bonds, including Lafarge securities.
Accelerating inflation in Europe has fuelled concern the European Central Bank may raise its key interest rate. Euro-region inflation rose to 2.5 per cent in May from 2 per cent in April. The US Federal Reserve lifted last Wednesday its target rate for overnight loans between banks to 1.25 per cent from a 45-year low of 1 per cent to curb rising prices.
"We decided to go before the Fed decision, just in case the markets reacted adversely," pushing up yields, said Caroline Fintz, funding manager in Paris at Klepierre SA, a French real-estate company that last week raised 600 million euros (US$720 million) in its first debt sale in three years.
Lafarge, the world's biggest cement maker, wants to issue new 10-year debt yielding between 72 basis points and 82 basis points more than midswaps, a benchmark for corporate borrowing, according to a company statement on June 29. The seven-year bonds the company wants to replace were sold in 2001 at a yield of 145 basis points more than midswaps.
"We are being offered terms that are a little bit expensive," said Pictet's Bucaille. "It's not that compelling." Bucaille said he hasn't yet decided whether to accept the offer.
The offer is conditional on holders of at least 300 million euros of the securities accepting it. The company will save about 11 million euros (US$13.2 million) in annual interest payments if it's accepted, according to Bloomberg calculations.
Paris-based Lafarge is rated BBB by Standard & Poor's and Baa2 by Moody's Investors Service, the second-lowest investment-grade from both rating companies. Patrice Tourliere, the company's treasurer, wasn't available for comment.
Coca-Cola HBC, the world's No 3 bottler of Coke drinks, began a series of presentations to investors on Thursday to swap its 5.25 per cent bonds due 2006, according to a banker familiar with the transaction.
The Athens-based company is rated A3 by Moody's, the fourth-lowest investment grade, and A, a level higher, by S&P. Calls to the company's headquarters on Monday weren't answered.
The average extra yield, or spread, investors demand to hold investment-grade company debt instead of European government debt was at 52.2 basis points on Friday, close to the four-year low of 49.4 basis points reached June 28, according to the Merrill Lynch index, which contains 1,343 bonds with a face value of 854 billion euros (US$1.02 trillion).
"Many people are negative on the corporate bond market and expect a widening in credit spreads," increasing company borrowing costs, said Fabien Weber at Julius Baer Asset Management in Zurich, which has US$43 billion under management. "I don't expect that. What's important is that I still see growth in the economy."
The yield on the 10-year German bond last week fell to 4.23 per cent, its lowest since May 6, from 4.32 per cent a week earlier.
Spreads probably "won't move significantly either way" in coming weeks, said Andrew Sutherland, a fund manager at Standard Life Investments Ltd in Edinburgh and part of the team that manages the company's US$48 billion in bonds. "Not many companies need the cash at the moment."
(China Daily 07/12/2004 page12)
