Tereos failed deal hints at tough times for HY bonds

The French sugar producer pulls its non-call six-year perpetual as investors report a "fairly miserable" outlook for credit markets in the region.

French sugar producer Tereos scrapped what would have been its first bond deal in Asia, a non-call six-year perpetual, on Monday night as investors reported weak conditions on the region's high-yield credit markets.

The group had hoped to join a growing trend of European borrowers raising money in Asia to take advantage of the appetite from Asia's private banks and institutional investors for income-generating instruments, higher yield spread and credit risk offered by instruments such as perpetual bonds.

But the Asian high-yield market has seen a torrent of supply – $21.6 billion in the first six months, according to Moody's – and investors told FinanceAsia high-yield debt was losing its sheen. That could have implications for the $6.8 billion of notes due for refinancing in the next 12 months, including those high yield bonds of trouble commodities trader Noble Group.

Sources close to the Tereos deal, which had a fundraising target of up to $200 million, said the decision to pull out was down to the issuer's desire to reduce the yield from the initial "low 7% area" guidance it had gone out with, rather than the wider market outlook. But investors reported grim conditions in the region's high-yield market that meant, as one Singapore-based fund manager put it: “New issues have been challenging to digest.”

“The deluge of supply has hit investment performance,” said the fixed-income investor. At least four issuers hit the market in Asia on Monday, raising $1.86 billion between them.

As a result of the tight spread conditions, G3 debt issuers in Asia ex- Japan, including government and financial insitutions, have sold $173.4 billion worth of bonds this year, or 90% of total for the whole of 2016, according to data compiled by Dealogic.

In the secondary market, some of the new issues have dropped below their offer price. Spreads on India's HPCL-Mittal Energy, China Haohua Chemical and Korea Gas were trading 2 basis points to 3bp wider on Tuesday. 

However, the fund manager acknowledged: “At 7% guidance the BB-rated group may have had second thoughts on their pricing, which was pretty generous.”

Another multi-asset fund manager in Hong Kong told FinanceAsia last week that the credit market has been a "fairly miserable" asset class to bet on for some time now. 

“We don’t own anything in credit because everything has priced in,” the investor said. "This is a terrible market for people like us." Amid the ongoing search for yield, the Asia iTraxx IG index, a gauge of investment-grade spread over US Treasuries, dropped to 85bp last week, hovering near multi-year lows.

However, a source close to the Tereos deal said the reason the issuer pulled out was not down to conditions in the market. “The issuer is looking to compress the yield because it has a significant pickup over the comparables in Asia,” the source said. "There is nothing about market conditions or its credit rating, but the issuer voluntarily decided not to pull the trigger."

Black Monday

On Monday afternoon, Tereos went out with an initial guidance in the “low 7%” area, but the French group and its syndicate banks – HSBC, Natixis, BNP Paribas and Standard Chartered – did not provide further updates on the proposed debt sale thereafter.

Tereos, the world’s third-largest sugar producer, planned to tap the pockets of private banking and institutional accounts in Asia and Europe. “Asian private-banking demand for perpetual securities has been very strong this year, so Tereos think they can open a new funding channel in Asia,” the source close to the deal said on Monday.

Tereos' perpetual bond was rated three notches below the group's double-B rating from rating agency S&P, reflecting its subordination risk and the option to defer the interest payment.

In the price discovery process, investors said there was no direct comparable in the Asian credit universe, but they cited the unrated perepetual notes by Olam and Trafigura as their valuation yardsticks.

Singaporean commodities trader Olam, which counts sovereign wealth fund Temasek and Japan’s Mitsubishi Corp. as its largest shareholders, has a 5.35% perpetual bond, first callable in March 2021, which was trading at 5.625% on Monday. Trafigura’s 6.875% perpetual bond, which is callable in March 2022, was trading at 6.375%.

Assuming Tereos' perpetual notes were fixed at a yield of 7%, the French group offered a decent pickup of 62.5bp to 1.375% over its closest comparables.

The source added that Tereos met investors in Zurich, London, Singapore and Hong Kong in the past few months, but did not provide further details on the amount of initial interest received after the marketing roadshows.

Clément Decorne, a Tereos spokesman, couldn't be reached for comment on Tuesday.

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