Milan-headquartered construction company Webuild landed its first sustainability-linked bond on Wednesday, but the chunky premium it is giving investors underscores the broader tone of the market.
“It is a weak backdrop, look at equities,” said one high-yield banker. “The first few days of this week were a bit of shocker and rates have been edging up. But, that said, when rubber hits the road, deals are getting done.”
On Wednesday morning, the issuer came out with price talk of 4% area for a €400m 4.5-year BB–/BB rated senior unsecured, in line with IPTs. Pricing came in at 3.875% late in the day.
“I think that it is a little too early to call how the market is shaping up, but I will say that Webuild is flashing a pretty big premium versus its curve,” said a second banker during bookbuilding.
The issuer has €750m 5.875% December 2025s that were yielding 3.364% on Tradeweb on Wednesday afternoon.
The moves higher in rates are having a clear impact on Europe’s high-yield primary in terms of the maturities that some issuers are willing to attempt and the pricing that is required to access the market. Webuild’s new deal was no exception.
“Webuild is a 4.5-year and there is a reason for that,” said a third leveraged finance banker.
“Partly it fits into their maturity profile, they have a 2025 and 2027, but also why push duration, given the mantra so far this year has been ‘don’t do duration’? It is not like you couldn’t do longer, but if you want to optimise your costs we have been advising that shorter duration is more attractive.”
Investors say that the premium they would be looking for may be considerable, even on something relatively mid-dated.
“Even at five years, versus a lot of existing stuff I would expect a relatively steep curve,” said Kyle Kloc, senior portfolio manager at Fisch Asset Management.
“And, of course, the longer I go out, the greater a premium I would expect. From an issuer standpoint, they may not be that happy with where we would be willing to look at a deal.”
The right level?
There was also some disagreement among analysts over the appropriate pricing for the new issue.
“We believe investors should ask for a maturity and issuance premiums of around 30bp,” said Andrea Oelsner, a credit analyst at Spread Research. “As such, we recommend to subscribe in the 3.375%–3.5% area.”
The high level of demand for the company’s services, the successful recent integration of the Rome-based construction company Astaldi and associated operational synergies, an increased focus on low-risk countries and government spending plans likely to help boost activity were all seen as supportive factors for Webuild’s bonds by Oelsner.
While acknowledging some of these points, the analysts at CreditSights highlighted concerns linked to the company’s high level of exposure to the volatile construction sector in Italy, the firm’s general lack of information disclosure and a high leverage for its rating bracket.
The company carries ratings of BB–/BB and based on net debt, CreditSights sees Webuild’s leverage at 4.3x. That figure, however, is the product of a disagreement with Webuild over how the company calculates its net debt. The issuer reports a leverage of 1.5x. CreditSights does not recommend buying the bonds if pricing comes in below 4%.
Ambitious, but not the full picture
To avoid paying a 75bp redemption premium, the issuer must reduce its carbon intensity by 50% by the end of 2025, incorporating Scope 1 and 2 emissions, from a 2017 base.
According to an investor presentation, the company’s carbon intensity has already fallen by almost 30% since the base year.
While several sources said that the target is ambitious and second-party opinion provider Vigeo Eiris said that the KPI is relevant, core and material to the issuer, it has been pointed out that the target overlooks the majority of the company’s total emissions by excluding Scope 3 emissions.
Scope 3 emissions account for around 80% of the Webuild’s emissions, according to Vigeo Eiris.
