LONDON, May 15 (IFR) - The fate of a capital boosting exercise for Deutsche Lufthansa hung in the balance this week after the issuer failed to surface with a hybrid bond that it hopes will relieve some of its burning equity pressures.
The German airline has engaged twice with fixed income investors since the end of March but the current turbulent market conditions could put the proposed deal in jeopardy, market players say.
10-year Bund yields have risen 60bp over the last month, while yields on corporate hybrids have risen to 3.15% from 2.84% in the same time, according to the Bank of America Merrill Lynch global corporate hybrid index.
Lufthansa was primed to issue a 500m-750m 60-year non-call 5.5-year deal last week following a call with investors. This was the second time it had to turn away from the market, having cut short its initial attempt in March when a plane operated by Lufthansa’s Germanwings budget airline crashed in southern France.
The company has said it was “in need of an urgent solution” to fix its soaring pension burden, which in turn is putting considerable pressure on its equity.
“The equity community thinks they could have to do a rights issue. If they bring a hybrid, this overhang should be gone and the share price should in theory move up. But they were badly advised to try to re-launch the bond in a weak market,” one investor involved in the meetings said.
Market players say conditions will need to improve materially and secondary performance across new primary issues will need to stabilise before Lufthansa can safely issue the deal.
“They probably had some anchor orders before they connected with investors the second time around. But the company - as it’s publicly listed and well known - probably has another chance at issuing the deal in the near-term without having to re-engage with investors,” a banker away from the deal said.
Investors say their price expectations have changed substantially from the 4.25-4.5% range they were expecting last week, and any new deal would have to be priced according to market conditions.
“There will be a clear need for an extra premium on this. They need to action this hybrid due to their growing pension deficit, but they do have until the end of the year as they’re not over-leveraged, although they shouldn’t wait too long,” one banker said.
Leads say the issuer is still monitoring the market and timing could be positioned for next week if conditions improve.
Credit Suisse and Deutsche Bank are structuring advisers, together with BNP Paribas and HSBC as joint bookrunners.
The new deal will have 50% equity credit from S&P and is expected to be rated BB.
Moody’s is not rating the issue. The issuer is rated Ba1/BBB- (positive/stable) at the senior level. (Reporting By Laura Benitez, Editing by Helene Durand, Julian Baker)