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4-Traders Homepage  >  Equities  >  Euronext Paris  >  Sanofi    SAN   FR0000120578


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08:46aSANOFI : A medium term support level to take advantage of
09/26DJLufthansa Hits Limits of ECB Bond Buying
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Lufthansa Hits Limits of ECB Bond Buying

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09/26/2016 | 06:15pm CEST

LONDON-German airline Deutsche Lufthansa AG pulled a ?500 million ($562 million) debt sale on Monday, in an unusual move that signals limits to the European Central Bank asset-buying program that has turbocharged Europe's bond market.

Lufthansa, German's largest airline by traffic, said it wouldn't proceed with the bond placement because of unattractive pricing. A spokeswoman said the airline would "re-engage in the capital market at a later date."

The retreat is the first major misstep for a European blue chip company raising debt since the ECB announced in March that it would buy corporate bonds. That buying has helped push down yields across Europe, allowing companies to raise funds at ultralow rates and unleashing a flurry of debt issuance.

Last month was an August record for new issuance of euro-denominated, investment grade corporate debt, according to Dealogic.

Tom Ross, a portfolio manager at Henderson Global Investors, said Lufthansa's move showed investors still have price discipline despite the ECB's huge buying spree.

"I had no intention of buying that bond," he said.

Since early June the central bank has bought more than ?27.9 billion in corporate bonds as of Friday, including some parts of an earlier-issued Lufthansa bond. The average yield on AAA-rated euro-denominated corporate debt is now just 0.61%, down from 1.45% at the start of the year, according to data from IHS Markit's iBoxx index.

The extra demand has been such a boon for companies that French pharmaceutical giant Sanofi SA and German consumer goods firm Henkel AG were able to issue euro-denominated bonds at a negative yield this month. That meant that investors were paying for the privilege of lending their money to companies.

Lufthansa, though, appears to have misjudged investor sentiment. The airline early Monday was set to offer a yield of under 1% for seven years, far lower than the average yield of 1.23% that similarly rated corporates have to pay to borrow for just over 5.5 years, according iBoxx index.

Hours later, Lufthansa retreated.

Olivier Monnoyeur, portfolio manager at BNP Paribas Investment Partners said Lufthansa may have become complacent. Bond issues from similar companies have been popular, but Lufthansa has hit investors with a string of bad news in recent months.

In July, the airline issued a profit warning after terrorist attacks in Europe caused demand on some lucrative long-haul routes to plummet. Operating earnings this year will fall short of the level seen in 2015, Lufthansa said.

This month, Standard & Poor's cut Lufthansa's debt outlook to "negative" from "stable" while retaining the "BBB-" long-term debt rating, or one notch above noninvestment grade. S&P said it could cut Lufthansa's outlook in the next one to two years.

A downgrade to noninvestment grade would make Lufthansa bonds ineligible for ECB purchase.

"It's in the back of people's minds, because there's no room for error," said Chris Telfer, portfolio manager at ECM Asset Management. "Returns are so thin that if it goes wrong, there's little chance of making it back, so people are less inclined to take on riskier names."

That raises the prospect that investors will steer clear of the band of companies that hover above a junk rating, in a further example of how the ECB's bond buying is shaping markets.

Benedict Scholl, a research analyst at Bank of America Merrill Lynch, said the failure to place the bond could serve as a "wake-up call" to the airline for the need to achieve a more stable investment grade rating.

It may also be a wake up to a bond market that has grown used to central bank largess.

There is a "complacency that has taken over corporate bond sellers due to the presence of a price-insensitive buyer," Mr. Ross said.

Write to Tasos Vossos at Tasos.Vossos@wsj.com, Mike Bird at Mike.Bird@wsj.com and Robert Wall at robert.wall@wsj.com

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Financials (€)
Sales 2016 36 923 M
EBIT 2016 9 287 M
Net income 2016 5 275 M
Debt 2016 5 441 M
Yield 2016 4,35%
P/E ratio 2016 15,50
P/E ratio 2017 14,21
EV / Sales 2016 2,51x
EV / Sales 2017 2,51x
Capitalization 87 126 M
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Mean consensus HOLD
Number of Analysts 26
Average target price 82,5 €
Spread / Average Target 22%
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Olivier Brandicourt Chief Executive Officer & Director
Serge Weinberg Chairman
JÚr˘me Contamine Chief Financial Officer & EVP-Finance
Elias E. Zerhouni President-Global Research & Development
Yong-Jun Liu Head-Global Research & Development
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