Telefonica opts for higher costs to appease hybrid investors

Telefonica SA had to pay a hard-hitting coupon of more than 7% as it sought to replace some subordinated bonds early, showing the growing cost of maintaining influence with hybrid bond investors.

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(Bloomberg) – Telefonica SA had to pay a hard-hitting coupon of more than 7% as it sought to replace some earlier subordinated bonds, showing the rising cost of maintaining influence with hybrid bond investors.

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The Spanish company received more than 4.75 billion euros ($4.9 billion) in orders for a 750 million euro green hybrid bond on Monday at a final yield of 7.125%, according to a person familiar with the matter , who asked not to be identified because she is not authorized to speak about it. The huge demand has driven prices down from an opening target range, although this is still the highest coupon for an existing Euro Telefonica bond.

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At the same time, the telecommunications company is looking to buy back part of two hybrid bonds – which have characteristics of debt and equity – which will reach their first redemption dates next year. The early replacement comes amid a bumper few days for bond sales in Europe as the credit risk gauge fell to its lowest since August, with market sentiment helped by weaker US inflation data. .

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Telefonica’s decisions underscore its “strong track record of being a good player in hybrid markets and could help its subordinated debt outperform its peers,” Bloomberg Intelligence senior credit analyst Aidan Cheslin wrote on Monday. Although there has been speculation that some companies may end up breaking market convention of calling hybrids at the first opportunity, Cheslin sees more so-called extension risk in sectors like real estate. and energy.

The interest rate on the new note far exceeds what Telefonica currently pays for the bonds it wants to buy back, as well as the rate it would pay if they were extended. Notes redeemable next March and September are currently paying 2.625% and 3%, respectively, and would both pay coupons over 5% if extended, based on current market rates.

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Companies typically seek to replace hybrids at the earliest opportunity to appeal to investors and retain equity content in their financial profiles, which supports credit ratings. While Telefonica is using a good market window to replace notes earlier, other companies have made more unusual decisions about their hybrid bonds as the cost of issuing new debt soars.

Companies get creative with a $50 billion hybrid bond dilemma

The purpose of the redemption is to give bondholders “the opportunity to switch to the new notes before the next first call dates,” according to a company statement. Telefonica has reduced the prices of its new tickets from an opening target range of 7.625% to 7.75%. Company representatives did not immediately respond to a request for comment.

(Updates with final terms.)



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Robert D. Coleman