As companies branch out beyond traditional funding sources, many are considering tapping the unrated bond market. Investors are snapping up deals – enjoying the higher returns from unrated bonds—and companies are starting to recognize that demand. While they may have to pay a premium to make up for the lack of a rating, and the disclosures that go with it, the development could augur less reliance on rating agencies, whose value has been called into question.
A number of deals have gone forward in both the US and in Europe—although more in Europe, which traditionally has a larger unrated market. For example, UK rail company National Express launched a $570 million, 7-year deal in January, which came in with a coupon of 6.25 percent.
In March, global energy and telecommunications cable company Prysmian launched a €400 million deal (US$540 million) that was 7.5 times oversubscribed on a coupon of 5.25 percent. In addition, Belgian pharmaceutical UCB, Spanish industrial Abengoa, real estate management firm Segro and shipping company AP Moller Maersk all launched unrated deals successfully in recent months.
Enrico Camerinelli, analyst at consultancy Celent, explains: “Unrated bonds do not have an external credit rating by a rating agency, which means that no external statement has been made about their default probability. They mainly rely on the company’s brand recognition, which is extremely important, especially in turbulent times.”
The strength of high-quality brands is apparent in the performance throughout the crisis of companies owning top-rated brands. An FT report from April this year found that the Brandz Top 100 significantly outperformed the S&P 500 in terms of portfolio performance coming out of the crisis. The Brandz Top 100 is a ranking put out each year by Millward Brown Optimor that puts a quantitative value on a brand – such as Coca Cola or Yahoo! – and ranks the most valuable brands worldwide.
All of which means that should more big-brand-name firms launch unrated deals, investors are likely to take a good look. Camerinelli adds: “The appeal to investors is the return rate, while to issuing companies it is reduced administrative paperwork. In addition, many issuers of unrated bonds are family-owned companies that do not want to disclose too much financial information.”