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Brexit fears put aside as corporates go for sterling

* Sterling market reopens after Brexit vote

* Issuers jump as yields drop

* Buyers keen after gap in supply

By Laura Benitez

LONDON, June 30 (IFR) - British American Tobacco and Brown-Forman reopened the sterling corporate market on Thursday after a month-long hiatus, attracting blowout demand just a week after the UK voted to leave the European Union.

Bankers had expected the euro market - underpinned by the ECB's Corporate Sector Purchase Programme - to reignite the capital markets following the Brexit-inspired turmoil.

"I imagine many are looking at these deals and thinking, 'sterling, really?'. But there actually is overwhelming demand, which will be evidenced today," said a lead banker on BAT's five-year trade.

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US wine and spirits company Brown-Forman announced it would tap investors for sterling and euro financing on Thursday morning, and was followed shortly afterwards by the London-headquartered cigarette maker.

Investment-grade corporates have sold just £2.55bn of sterling paper this year, while euro issuance tailed off earlier in June as markets braced for potential volatility.

However, after a torrid start to the week following the referendum result, broader market sentiment has improved markedly over the last three days.

GREAT OPPORTUNITY

"It (Other OTC: ITGL - news) 's a great opportunity to issue sterling. We have quite a few maturities coming up and thought we would capitalise on this flight-to-quality sentiment we're seeing post the referendum from investors," said Oliver Wolfensberger, head of corporate finance and financial risk at BAT.

"Underlying Gilts are very attractive so we thought it's the right time to issue something short-dated."

BAT began marketing the five-year benchmark at 150bp area over the January 2021 Gilt. The firm ratcheted pricing in to plus 130/135bp, then set the reoffer spread at the tight end for a £500m deal on orders of some £2.2bn.

A lead banker said the new issue premium was zero at the final spread, although investors disagreed and said the concession was more like 25bp.

"We held around 30 to 40 calls with investors this week to ensure demand was there. Many had assumed there would be no appetite, but it's really very strong," the lead said.

Leads on the A3/A- rated deal are Barclays (LSE: BARC.L - news) , HSBC, Lloyds and RBS (LSE: RBS.L - news) (B&D).

US drinks company Brown-Forman, whose brands include Jack Daniel's and Finlandia Vodka, met investors prior to the referendum on June 21 and 22 after mandating a euro and/or sterling transaction.

Part of the proceeds have been earmarked to fund the £281m acquisition of the BenRiach Distillery Company. In all, Europe accounts for some 31% of Brown-Forman's sales.

The A1/A-/A- rated company followed up today with an expected 300m 10-year at mid-swaps plus 105bp area and an expected £300m 12-year at 160bp area over Gilts.

Bank of America Merrill Lynch, Barclays, Citigroup (NYSE: C - news) and Deutsche Bank (LSE: 0H7D.L - news) are lead managers. (Reporting By Laura Benitez; Editing by Philip Wright, Alex Chambers, Julian Baker)