Lufthansa Pulls 500 Million Debt Sale
September 26 2016 - 02:30PM
Dow Jones News
LONDON—German airline Deutsche Lufthansa AG pulled a €500
million ($562 million) debt sale on Monday, in an unusual move that
signals limits to the European Central Bank asset-buying program
that has turbocharged Europe's bond market.
Lufthansa, German's largest airline by traffic, said it wouldn't
proceed with the bond placement because of unattractive pricing. A
spokeswoman said the airline would "re-engage in the capital market
at a later date."
The retreat is the first major misstep for a European blue chip
company raising debt since the ECB announced in March that it would
buy corporate bonds. That buying has helped push down yields across
Europe, allowing companies to raise funds at ultralow rates and
unleashing a flurry of debt issuance.
Last month was an August record for new issuance of
euro-denominated, investment grade corporate debt, according to
Dealogic.
Tom Ross, a portfolio manager at Henderson Global Investors,
said Lufthansa's move showed investors still have price discipline
despite the ECB's huge buying spree.
"I had no intention of buying that bond," he said.
Since early June the central bank has bought more than €27.9
billion in corporate bonds as of Friday, including some parts of an
earlier-issued Lufthansa bond. The average yield on AAA-rated
euro-denominated corporate debt is now just 0.61%, down from 1.45%
at the start of the year, according to data from IHS Markit's iBoxx
index.
The extra demand has been such a boon for companies that French
pharmaceutical giant Sanofi SA and German consumer goods firm
Henkel AG were able to issue euro-denominated bonds at a negative
yield this month. That meant that investors were paying for the
privilege of lending their money to companies.
Lufthansa, though, appears to have misjudged investor sentiment.
The airline early Monday was set to offer a yield of under 1% for
seven years, far lower than the average yield of 1.23% that
similarly rated corporates have to pay to borrow for just over 5.5
years, according iBoxx index.
Hours later, Lufthansa retreated.
Olivier Monnoyeur, portfolio manager at BNP Paribas Investment
Partners said Lufthansa may have become complacent. Bond issues
from similar companies have been popular, but Lufthansa has hit
investors with a flurry of bad news in recent months.
In July, the airline issued a profit warning after terrorist
attacks in Europe caused demand on some lucrative long-haul routes
to plummet. Operating earnings this year will fall short of the
level seen in 2015, Lufthansa said.
This month, Standard & Poor's cut Lufthansa's debt outlook
to "negative" from "stable" while retaining the "BBB-" long-term
debt rating, or one notch above noninvestment grade. S&P said
it could cut Lufthansa's outlook in the next one to two years.
A downgrade to noninvestment grade would make Lufthansa bonds
ineligible for ECB purchase.
"It's in the back of people's minds, because there's no room for
error," said Chris Telfer, portfolio manager at ECM Asset
Management. "Returns are so thin that if it goes wrong, there's
little chance of making it back, so people are less inclined to
take on riskier names."
That raises the prospect that investors will steer clear of the
band of companies that hover above a junk rating, in a further
example of how the ECB's bond buying is shaping markets.
Benedict Scholl, a research analyst at Bank of America Merrill
Lynch, said the failure to place the bond could serve as a "wake-up
call" to the airline for the need to achieve a more stable
investment grade rating.
It may also be a wake up to a bond market that has grown used to
central bank largess.
There is a "complacency that has taken over corporate bond
sellers due to the presence of a price-insensitive buyer," Mr. Ross
said.
Write to Mike Bird at Mike.Bird@wsj.com and Robert Wall at
robert.wall@wsj.com
(END) Dow Jones Newswires
September 26, 2016 14:15 ET (18:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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