June 8, 2015 / 3:42 PM / 2 years ago

Embraer offering generous premium on new 10-year bond

NEW YORK, June 8 (IFR) - Brazilian aircraft manufacturer Embraer is out with a new 10-year bond on Monday and is enticing investors with initial price thoughts that seem to carry a hefty new issue premium.

Embraer pulled the trigger on the bond today after holding back last week following roadshows in a week that saw considerable rate volatility in the US. Roadshows for the trade ended on June 2.

Keen to get its deal done this time around, the issuer is adopting a defensive pricing approach of offering a big premium initially then probably use a building book to tighten levels.

At initial price thoughts of Treasuries plus 300bp, Embraer (rated Baa3/BBB) is offering a 50bp pick-up to the 250bp G-spread on its outstanding 5.696% 2023s.

Against the 2022s, which are trading at a G-spread of 216bp, that premium looks even more alluring.

The 2023s are particularly illiquid and tend to trade wider than they perhaps should. That's partly because the securities were issued as a result of an exchange and were thus distributed among a handful of existing holders, said a DCM banker.

Even after adding another 30bp for a curve extension and new issue premium, the issuer has a fair amount of room to squeeze pricing from here, said a second banker away from the deal.

Other Brazilian Triple B names such as food company BRF (Baa3/BBB/BBB-) and pulp paper producer Fibria (Ba1/BBB-/BBB-) are trading at tighter levels.

For example, their 4.75% and 5.25% 2024s are being quoted respectively at G spreads of 235bp and 260bp.

US aircraft manufacturers are much larger and Embraer's other competitor of a similar size, Bombardier, is sub investment grade.

The high spread on offer, however, should ensure a decent crossover bid from US high-grade accounts, many of whom already fly on the company's jets and are familiar with the credit.

"It would be difficult to show one Triple B high grade credit in the US high grade universe that pays 300bp," said the second banker. "A normal BBB would pay high 100s in the US market."

Moody's, which rates Embraer Baa3, underlines the company's healthy operating cash flows and strong financial metrics.

According to Brazilian brokerage Votorantim Corretora, net debt/EBITDA is still at a low 1.8x over the last twelve months, though that has climbed recently.

Today's debt issuance shouldn't impact leverage metrics as proceeds will be partly used for liability management.

The borrower hasn't been in the bond markets since late 2013 and that was a liability management trade - an exchange of the 2017s and 2020s for the new 2023s - rather than new money.

But it is expected to become a more frequent issuer given its large investment plans as it transitions to its second generation of E-jets.

"They will be more active going forward because they are still going through their capex plan," said the second banker.

The size of the new deal is expected to be anywhere between US$500m-US$750m, according to an investor.

Citigroup and Morgan Stanley are leading the deal. Settlement is on June 15, while maturity will fall on the same date in 2025. The SEC registered, senior unsecured bond will be listed in New York, and will be governed by New York law. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)

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