Telecom Italia is driving by with its first deal as a high-yield rated entity. The fallen angel has launched a euro benchmark seven-year (non-call life) unsecured notes offering. Barclays, Credit Agricole CIB, Goldman Sachs and Societe Generale CIB (B&D) are joint bookrunners. Bank of America Merrill Lynch, HSBC, ING and Natixis are other bookrunners.
Price guidance is mid-swaps plus 325 bps area, which equates to a yield of roughly 4.875%, according to sources. Proceeds will be used for general corporate purposes.
The company has a well-stocked curve, which has added between half a basis point and 10 bps on the spread. The two main comparables for the new notes are the 4.875% notes due September 2020, and the 5.25% notes due February 2022 (both are euro-denominated). These were quoted in the region of z-spread plus 290 and 315 on the bid side, prior to the new mandate (they have since risen by five and four basis points, respectively), according to sources.
This puts fair value for the January 2021 maturity at roughly 295, which equates to a new issue premium of about 30 bps at the mid-point of guidance.
Ratings are BB+/Ba1/BBB-, and the ratings outlook is negative at all three rating agencies. Further downgrades are possible if Telecom Italia fails to improve its operating performance, cut debt, and improve cash flows, according to Standard & Poor’s.
In November last year, S&P downgraded Telecom Italia’s corporate credit rating to BB+, and the company, having previously been downgraded by Moody’s, became a fallen angel. Consequently €27 billion of the company’s debt fell into the high-yield category. Despite concerns leading up to the downgrade that the entry into high-yield would see its cash curve come under pressure as investment-grade accounts were forced to dump paper, the entry was in fact orderly.
Investment-grade accounts had time to either lighten up their exposure to Telecom Italia, such that they can still hold a smaller amount of paper by utilizing the buckets many of them have that enable them to hold up to 10% of non-investment grade paper. At the same time, there was no stampede from the high-yield investor base to source paper, partly because accounts were unsure where on Telecom Italia burgeoning curve they wanted to take exposure, and also because many felt a new issue would emerge early this year – offering a new issue premium – given the company has sizable refinancing needs.