best debt deals, The

Global Finance, Feb 1998 by Shepherd, Bill

A wide geographic mix of investors adore parallel bonds, and the tranches' fungibility adds to liquidity; they're particularly popular with arbitrageurs. As a result, Siemens treasurer Christian von Ahlefeld reckons that parallel bonds are cheaper than any other form of debt. The Siemens tranches were launched at 17 basis points over German government bunds, 20 basis points over Dutch governments, and 14 basis points over French governments.

Morgan developed the first parallel offering for Austria in January 1997. That was swiftly followed by an issue arranged for the European Investment Bank by ABN-AMRO and SBC Warburg and by another Morgan issue for L-Bank, Baden-Wurttemberg's state development agency. In barely a year the market has become enormous. Rarely has a new kind of security caught on so quickly.

4 GEBERIT INTERNATIONAL'S

JUNK BONDS

US investment bankers have wanted for years to get a junk bond market going in Europe. European investors have been leery of sub-investment-grade debt ever since a Swiss franc market in junk bonds collapsed in the 1980s after such issuers as Polly Peck, Heron, and Olympia & York defaulted. European issuers, mostly British, have been placing junk debt in the US 144a market, then using costly swaps to convert the proceeds to European currencies.

But Merrill Lynch opened the door to a new nondollar junk market last April when it succeeded in winning a lot of European buyers for DM157.5 million ($92 million) in 10-year subordinated debentures for the acquisition of Geberit International by London buyout firm Doughty Hanson. The deal was helped by the fact that Geberit's brand name plumbing equipment is well known in Europe. Though some of the debentures were sold in the 144a market, Merrill figures that 70% were bought by European investors.

The issue, which carried a 10.125% coupon, was rated B2/B and was launched at 420 basis points over Germany's benchmark 10-year government bunds-a fat yield indeed. Morgan Stanley quickly followed with a DM175 million junk deal for Exide Holding, the Continent's largest maker of auto and industrial batteries, and Salomon Brothers and Union Bank of Switzerland did an even bigger deal for Impress Metal.

5 PACIFIC GAS & ELECTRIC'S

"STRANDED COST" BONDS

The state of California is trying to open up its power industry to competition and bring down users' electricity rates. Problem: The utilities have high capital costs justifiable under monopoly pricing but not covered sufficiently by lower rates. The difference, chiefly the expense of long-term debt, is known as "stranded" costs. To help keep the big power companies from becoming insolvent (and thus halting the electricity flow), state legislators devised an intriguing securitization scheme that redirects a portion of users' electricity payments through a state financing authority to back shorter-term bonds, whose proceeds go to reduce utility debt maturing as far out as 30 years.

The first such issue, raising $2.9 billion for Pacific Gas & Electric, came to market last December-and was a blowout success. Arranged by Morgan Stanley Dean Witter and Lehman Brothers, the deal came in eight tranches ranging from six months to 9.5 years. It was a fixedrate, amortizing deal, structured like some auto-lease securitizations, and market observers hailed it as the most popular US bond offering of the year.