Paper: Continental Should Sell More Debt Soon

Continental AG should strike while the iron is hot and sell more debt while the market is in a receptive mood. That’s the view of The Wall Street Journal’s Michael Wilson, who explained in an article published today (14 July 2010) that the company needs the money to service its 8.2 billion euro syndicated credit facility, which is due to be repaid in August 2012:

“Since the start of this year, the company has been promising to issue bonds, the proceeds from which will be used to repay the facility. However, volatility in capital markets during the start of this year meant it was only last week that the company felt confident enough to actually launch a deal.”

He said the recent sale “disappointed” with a 750 million euro transaction that was considerably smaller than the 1.5 billion to 2 billion euro figures that had been circulating. This sold at 99 per cent of face value and paid 8.5 per cent annual interest. Investors reportedly speculated that the size of the deal may have been limited by the fact that “the company wanted to keep the deal’s coupon on the right side of 9 per cent,” Wilson wrote, adding: “A number of institutional investors believed the bonds should yield more than 9 per cent, however the company’s popularity with German retail investors makes that unlikely.”

To Conti’s credit, financial sources say the recent bonds have performed “very well” following the sale, with notes trading as high as 103.25 per cent to 103.5 per cent of face value on the morning of 14 July. And ratings agency Moody’s recently said the deal shows the company has “regained a broader access to financial markets,” but warned it is only “chipping away” at the firm’s large debts.

Wilson’s advice: “The company could swallow the higher cost of financing to establish a new bond, or simply increase the size of the existing bond for more cash. If they were to plump for an increase, the above-par price of the bonds would offer another boon as it could effectively lower the interest rate Continental would have to offer to investors.”

The alternative would, says Wilson would be to wait, but that would be to risk missing out on current positive market sentiment and potentially run into concerns stoked by the level of euro-zone sovereign debt which could ward off investors.

Related News:

• Conti Reports Successful Eurobond Placement

• Continental Shares Rebound on Improved Second Quarter Outlook

• Analysts Raise Conti Earnings Estimate 20%