Total Takes Hybrids to Next Level

The lure of cheap funding prompted Total to tap the hybrid bond market for the first time this week, even though the French oil major is under no pressure to raise capital or defend its balance sheet.

 

The 5bn deal, raised with a record-low coupon for a euro-denominated hybrid, is another step in the development of the once-niche funding instrument. Hybrids receive 50% equity credit at the major ratings agencies, and were usually the preserve of companies needing to act to defend their ratings without tapping the equity markets.

 

But Total's deal - the highest rated of its kind - shows that even companies flush with cash find the cheap rates on offer too compelling to ignore.

 

"It's cheap equity, and cheaper than five-year debt was a few years ago," said a Total spokesperson.

 

The spokesperson said that the hybrid allows the company to borrow money to fund capex without increasing its gearing - or debt to equity ratio.

 

Investors attending Total's roadshows this week were nonetheless surprised that the company would issue hybrids, arguing that a borrower with such a strong balance sheet and ratings could just issue senior bonds.

 

One investor who attended one of the meetings said that a new senior deal would barely increase the company's gearing so would have little impact on its credit rating. "Investors like a nice clear rationale for issuance," he said.

 

Sarwat Faruqui, head of corporate syndicate at Citigroup, the deal's structuring adviser, said that although Total's senior funding levels would not be materially impacted by a modest rating change, the company wants to remain at similar ratings with its peers, such as Shell, which sits comfortably in the Double A category.

 

Total's rating with Moody's (MCO) is Aa1 (stable) but is AA- with S&P (negative outlook). The deal's expected rating was Aa3/A.

 

The investor argued that Total was probably more focused on protecting dividends than its credit rating, however.

 

"At US$70 average for oil in 2015 and post balance-sheet strengthening exercises, they have a cash shortfall of 3.5bn to pay out dividends without burning more cash," he said.

 

After announcing last week that it would take a US$6.5bn writedown in the fourth quarter because of weak oil prices and would be cutting investment and jobs, Total is issuing a scrip programme, where investors will be given the option to receive their dividends in shares.

 

Confusion over the deal's ultimate purpose did not stop investors piling into the deal, however, as they placed a whopping 20bn of orders for the 5bn deal that emerged on Thursday after the roadshows finished.

 

The 2.5bn perpetual non-call six-year tranche priced at 2.25% and the 2.5bn perpetual non-call 10-year at 2.625%, with orders skewed towards the latter.

 

The company started marketing the deal earlier on Thursday at 2.375% area and 2.75%-2.875% respectively.

 

The deal was far larger than many in the market had anticipated. Two investors, who had expected a 3bn deal, said the large size was possible due to the high relative yields on offer.

 

"It looks like they've had to leave a bit more on the table," said one.

 

The other investor said that the deal's unusually strong credit rating also drove demand, speculating that a large portion of orders came from investors that have rarely bought hybrids before.

 

Support continued in the aftermarket. According to a lead on the deal, the 2021 paper was bid at a cash price of 101.30 in the secondary market on Friday, while the 2025 was bid at 101.55.

 

Faruqui said strong demand came from the UK due to a number of domestic accounts having higher beta mandates than where Total's senior debt sits.

 

Citigroup and Barclays (BCS) were joint global coordinator with HSBC and SG as joint bookrunners.