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Where Warren Buffett goes, others tend to follow, and bankers are predicting that Berkshire Hathaway's euro debut will open the U.S. corporate issuance floodgates further. So far this year, U.S. firms have already sold an impressive 30 billion euros or so, according to Thomson Reuters data.
The U.S. conglomerate dominated the market on Thursday with its 3 billion euro three-tranche offering. And the action continued on Friday, with it being the most traded deal of the day, according to MarketAxess data.
Berkshire Hathaway's no-marketing policy outside of its shareholder meetings meant investors were given only a teaser announcement of its bond plans on Wednesday. But evidently that was all it needed: Pre-reconciled orders amounted to 7.5 billion euros, while all three bonds were the top traded at noon on Friday.
Compare this to GDF's landmark multi-tranche bond - incorporating the first vanilla note with a zero coupon from a corporate - that priced earlier this week. Not one of its four bonds made the top 10 traded on MarketAxess the day after they priced.
While this data is based purely on MarketAxess' post-trade service, Trax, and does not therefore capture all trading, the company does tend to process approximately 65 percent of fixed income transactions in Europe and its numbers therefore offer a relatively accurate reflection of volumes.
According to one banker away from that deal, the allocation on GDF, mainly buy-and-hold real money, was a reason it did not feature.
One of the leads also pointed out that none of the tranches was particularly large, so the bonds were perhaps less liquid. He added that since it priced investors have had a deluge of supply to focus upon, including that from Berkshire.
Luring in the masses
"For European investors, it was the first opportunity for them to even look at Berkshire, so perhaps some needed the announcement to assess it. But with the market so hot and the company and its CEO being so high profile, we knew it was positioned well," a lead on the transaction said.
Lead managers , Deutsche Bank, Goldman Sachs and Wells Fargo started marketing an eight-year tranche at 35bp area over mid-swaps, a 12-year at 50bp area and a 20-year at 65bp area, implying respective yields of around 0.90 percent, 1.34 percent and 1.75 percent for the Aa2/AA rated company.
Those yields were much lower than the 3.20 percent coupon on a US$1.7 billion bond that matured on February 11 this year which Berkshire is refinancing.
Leads set official guidance at plus 30bp area, 45bp area and 60bp area, all to price within a 3bp range. Final terms were announced for a 750 million euro eight-year at 27bp over mid-swaps, a 1.25 billion euro 12-year at 42bp over and a 1 billion euro 20-year at 57bp over.
Striking a balance
Berkshire's eight-year tranche priced at a premium to where its U.S. dollar deals trade around the same tenor. Its 3.00 percent February 2023s were quoted on Eikon at 55bp over swaps, although factoring in a euro/dollar cross-currency swap that is negative by around 40bp, this made for a premium of some 12bp on the euro issue.
"Companies are having to pay up on the shorter deals at the moment; and on Berkshire's shorter piece, leads should have left more on the table, as the shorter dated stuff is not well bid. Overall, the deal was well executed though and priced to perfection," said Louis Gargour, CIO and managing partner at asset manager LNG Capital.
The longer two tranches, due in 12 and 20 years, could have priced at relatively tighter terms post-swap, although any savings are theoretical, due to Berkshire Hathaway's lack of outstanding longer dated dollar paper.
"If swapped back into dollars, the eight-year comes around 10bp-15bp back of where the dollar bond trades," a lead on the deal said. "So, if the company was swapping back, it would maybe be wider, although on the longer pieces they could have theoretically saved 10bp-15bp, but it's tricky to assess as the curve is a weird shape," the lead said.
He added that for some U.S. corporates tapping the euro market it is a cost-saving exercise, but others may be doing it to keep some of the proceeds in .
Berkshire Hathaway has said it will use cash raised from the 3 billion euro deal to refinance some maturing dollar debt, although market players believe it also has a more local investment plan in mind.
"For where the swap rate is, I'm not sure if the deal makes sense. Maybe it's a coincidence that the company is rumored to be looking at investing in Germany, because raising euro funds for that reason would make more sense," a banker away from the deal said.
Berkshire Hathaway purchased a German retailer at the end of February, and chief executive Warren Buffet has since said he is ready to pay cash for more good German companies.
Setting a bigger trend
The relentless surge of U.S. corporates tapping the European bond market has continued unabated, partly due to the attractive basis swap levels between euros and dollars, despite this waning over the course of the year, especially for the shorter maturities.
Last week saw more than 15 billion euro of U.S. corporate issuance, with the likes of Coca-Cola, AT&T and offering multi-tranche deals designed to appeal to a wide range of investors, and Priceline, Tyco Electronics and adding single standalone maturities. Coca-Cola alone accounted for more than half the total - 8.5 billion euro.
Headline-grabbing, Berkshire Hathaway may encourage the theme to continue.
"Since Berkshire priced, we've received at least three phone calls from U.S. corporate treasurers enquiring about issuing in euros. I think Berkshire's deal is going to prompt much more supply," a syndicate official said.