Babcock takes plunge as BoE QE gets underway

By Laura Benitez

LONDON, Sept 27 (IFR) - Babcock lured over £1.1bn of investor demand for a £250m 10-year no-grow bond on Tuesday as the Bank of England fired the opening salvo in its hotly anticipated corporate asset purchase programme.

The support services organisation, which wrapped up investor presentations on Monday, took advantage of the strong market backdrop that has prevailed since the central bank's announcement in August that it would start buying corporate bonds.

That announcement has changed the face of the sterling bond market, with £8.95bn of investment-grade issuance raised by corporates since August 4, versus £4.7bn for the rest of 2016.

"We have come a long way since June's referendum announcement. If someone would have told me that sterling credit spreads would be 20bp tighter year-to-date after such result, I wouldn't have believed them," said Nicolas Trindade, senior credit portfolio manager at AXA Investment Managers.

UK borrower National Grid Gas, for example, attracted a mammoth £6bn of demand for its £3bn issue earlier this month, the largest corporate sterling bond of all time.

While Babcock's £250m capped deal will not be eligible for purchase under the BoE programme, it was bolstered by the momentum that is driving down prices, much like the European Central Bank's stimulus efforts in the corporate euro market.

"I think that we will see new issuers coming to the corporate sterling market now that the BoE has launched. I don't think we'll see issuers relever but we'll see more refinancing and new borrowers who have access to cheaper costs of funding," Trindade said.

LIMITED IMPACT

But while pricing dynamics have improved for issuers, bankers do not anticipate sterling credit to suffer from price distortions to the same extent as in the euro corporate market.

"The Bank of England's programme will be less of a moral hazard and is expected to be much more sensible in terms of approach; it won't distort the bond market like the ECB has," one DCM (BSE: 502820.BO - news) banker said.

The universe of non-financial sterling investment-grade bonds trading at a negative yield stood at 0.35% on September 27, according to Tradeweb, far less than the 22.09% in euros.

The BoE will buy up to £10bn of corporate paper over the next 18 months and will hold reverse auctions every Tuesday, Wednesday and Friday.

"The sterling market is limited with just 35-40 investors, so, inevitably, the BoE's programme will be more subdued, but it will still do what it needs to," the banker said.

There are 271 bonds issued by 92 companies that are eligible for BoE purchase and that provide a "material contribution to the UK economy", the central bank said.

CAUTION AHEAD

However, some are questioning how long the sterling rally can run.

"It's certainly been a good year for sterling investment. The market is performing well and returns are up across our sterling funds, but we have decided to start de-risking across our portfolios," Trindade said.

"We've seeing a real disconnect between valuations and fundamentals, and we generally see quite a lot of risks ahead with the Brexit outcome, as well as elections in the US, France and Germany."

Babcock, rated BBB (S&P), will price later today via active bookrunners HSBC, Lloyds and RBS (LSE: RBS.L - news) , and Barclays (LSE: BARC.L - news) and JP Morgan as passives.

Initial price thoughts were 140bp-145bp over the 1.50% July 2026 Gilt, with the paper later launched at plus 130bp. (Reporting By Laura Benitez; Editing by Philip Wright and Helene Durand)