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Corporates race to print first euro negative yield

* Corporates target negative yields

* ECB effect drives costs to new lows

* Demand for supply soars despite low returns

By Laura Benitez

LONDON, April 27 (IFR) - The race to print the first negative yielding corporate bond in euros is on after Unilever (Amsterdam: UZ8.AS - news) narrowly missed out earlier this week, as news of the ECB's corporate purchase plan drives funding costs to all-time lows.

Bankers last week speculated that a highly-rated corporate would price a 300m short-dated bond at a negative yield. This led many to speculate that Unilever (NYSE: UL - news) was the borrower in question when it announced a three-tranche issue on Monday that included a 300m no-grow four-year part.

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While there is already around 200bn of negative corporate bonds in the secondary market according to Bank of America (Swiss: BAC.SW - news) Merrill Lynch, the market has yet to see a negatively yielding primary corporate issue.

The Anglo-Dutch consumer goods company, rated A1/A+, priced its 300m four-year at a yield of 0.08%, securing a 0% coupon, the third corporate to do so in the euro market since 2015.

"I heard that Unilever was going for a negative yield, which could have been accomplished with three-year duration, but they thought they could do it with a four-year," one syndicate manager said.

He confirmed that one corporate borrower has already mandated banks for a deal in May in the hope of securing a negative yield.

"The issuer is an interesting one, it's quite a funky name and maybe one you wouldn't expect," he added.

A MATTER OF TIME

Dominic Kerr, European head of corporate origination at HSBC said during a press briefing last week that companies selling negative-yielding deals were the next step for the market.

"We have seen corporates issue 0% coupon notes in the two- and three-year part of the curve and the next natural step for the market would be a negative-yielding bond. In the current environment it would likely be a three-year trade from a highly rated corporate issuer," Kerr said.

Negatively yielding primary transactions have already happened in the public sector and covered bond markets where the ECB has been purchasing bonds for over a year. Berlin Hypo for example priced a 500m three-year in March at a yield of minus 0.162%, the first of its kind.

"With (Other OTC: WWTH - news) the ECB prepared to buy negative yielding corporate bonds (as long as the yield is greater than the -40bp deposit rate), we see this as another bullish tailwind for spreads. In effect, it removes zero as a psychological floor for corporate bond yields," BAML's analysts wrote last week.

Two international companies have already sold negative-yielding bonds in Switzerland, where central bank rates are even lower than the euro zone's.

Two international companies Sanofi (LSE: 0O59.L - news) and Engie (Brussels: ENGI.BR - news) - previously GDF Suez (Milan: 1GSZ.MI - news) - have already sold 0% coupon bond issues with barely positive yields, a trend that investors are still getting their heads around.

"I briefly looked at the Unilever deal, but it goes against the grain to buy it," one portfolio manager said about the trade.

"Apparently many people's systems can't cope with a negative coupon so they will issue at 0% coupon and change the price to reflect the negative yield.

"The world's gone mad."

Unilever's 1.5bn triple-tranche deal priced with single digit and negative new issue premiums, and still managed to attract orders of around 4bn despite the smidgeon of yield on offer.

Issuance of investment-grade corporate debt has surpassed 60bn since the ECB said in March it would include corporates in its 80bn per month quantitative easing plan - well above volumes in the year up to that point, according to IFR data. (Reporting By Laura Benitez)