European companies are selling the fewest bonds in six years as the sovereign crisis sidelines cash-rich treasurers increasingly wary of the region's banks.
Volkswagen AG, Europe's largest automaker, Italian power company Enel SpA and Renault SA led 80 billion euros ($107 billion) of bond sales this year, the smallest amount since 2005, according to data compiled by Bloomberg. Borrowers may cut sales further next year to a euro-era record low of 70 billion euros, Societe Generale SA estimates.
European companies sitting on 540 billion euros of cash reserves, the most in at least nine years, are shunning bond markets even with yields near the lowest levels since November 2010. Investors who view corporate bonds as a haven because they're less affected by the euro-region crisis are driving yields lower, while banks are being hurt because they're the biggest holders of government securities.
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"Yields are low, it's tempting, but then when you think what you'd do with that cash, then a lot of that temptation goes away," said Tony Kendall, the group treasurer for U.K. gas supplier Centrica Plc in Windsor, England. "Almost any bank could fail, depending on the circumstances, so for that reason we're less comfortable having money with banks."
Investment-grade corporate bonds of companies from Bayer AG to McDonald's Corp. yield 3.7 percent, less than the 4.4 percent average over the past five years, Bank of America Merrill Lynch's EMU Corporates, Non-Financial Index shows. The average yield dropped to as low as 3.1 percent on Nov. 1.
Investors charge a record 2.5 percentage points more to lend to banks than companies, Bank of America Merrill Lynch's Euro Corporates, Banking index shows. The gap has climbed from 0.89 percentage point at the start of the year as the average yield increased to 6.2 percent.
"You go out and raise money, that means you have more money that's going to be exposed to the banking system" through deposits, said Peter Hahn, a professor of finance at London's Cass Business School and a former managing director at New York-based Citigroup Inc. "Why would you want to do that?"
Banks are suffering as Europe's deepening debt crisis fuels concern about lenders' exposure to fragile debtor nations such as Greece and Italy. Italian 10-year bond yields climbed to a euro-era record of 7.26 percent on Nov. 25, while the yield premium over German bunds widened to 553 basis points earlier in the month. France's 10-year bond yield rose to 3.72 percent this month, while the spread on the AAA rated nation's debt jumped to a euro-era high of 190 basis points.
Fund Retreat
Moody's Investors Service said yesterday it may cut credit ratings for banks in 15 European nations as cash-strapped governments consider reducing support to creditors. Standard & Poor's downgraded 14 of the world's largest lenders from Bank of America Corp. and Goldman Sachs Group Inc. to UBS AG after revising its rating criteria.
U.S. prime money-market funds cut their holdings of European bank debt in October to 34.9 percent of their $642 billion of total investments, the lowest share since at least 2006, Fitch said on Nov. 22. Markit Group Ltd.'s index tracking credit-default swaps linked to senior bank bonds jumped to a record on Nov. 25. An increase signals worsening perceptions of credit quality.
Volkswagen in Wolfsburg, Germany, raised 6.3 billion euros from euro bond markets this year, the biggest non-financial corporate issuer, Bloomberg data show. Rome-based Enel, Italy's largest power company, was the second-biggest seller with 4.2 billion euros and carmaker Renault in Boulogne-Billancourt, France was third with 4.1 billion euros.
The market for corporate bonds in Europe is unlikely to revive next year with investor concerns about the future of the euro expected to persist into 2012, SocGen strategists Suki Mann and Juan Esteban Valencia wrote in a Nov. 24 report.
Companies may sell the fewest bonds since 2000 as a "defensive corporate mindset dominates," the SocGen strategists wrote. Redemptions next year will be less than 70 billion euros, the lowest since 2002, they said. Banks are expected to issue a "shockingly low" 50 billion euros of senior bonds, from 121 billion euros this year, they wrote.
"The case to take on more debt into an enterprise, even if the yields are quite low, isn't strong," said Andrew Sheets, head of European credit strategy at Morgan Stanley in London. "The uncertainty about the euro zone and the volatility in sovereign spreads has reduced investor confidence, but it also has to have reduced corporate confidence."
Revenue Hurt
The slowdown in syndicated bond sales damped revenue at European banks, which earn fees for advising on and organizing debt issues.
Deutsche Bank AG, the biggest underwriter of corporate bonds in euros this year, reported a 45 percent drop to 169 million euros in income from debt origination in the three months ended Sept. 30, the Frankfurt-based lender said Oct. 25. Investment banking revenue at Barclays Plc suffered this year as a fall in debt sales offset improvements in equity underwriting and merger advice, the London-based bank said Oct. 31.
Investment-grade companies are weathering the storm by building up reserves. Non-financial companies in the Stoxx Europe 600 Index such as Total SA and Fiat SpA amassed a total 540 billion euros in cash and cash equivalents at the end of 2010, data compiled by Bloomberg show. That compares with 492 billion euros in 2009 and 389 billion euros in the previous year, the data show.
"A number of large corporates have lots of cash on the balance sheet, like us," said Neil Garrod, the treasury director at Vodafone Group Plc in Newbury, England. "We need to see a much more certain global environment, not just European, for corporate M&A activity to pick up materially, which will mean that corporate bond issuance in general will likely pick up."
Bloomberg News
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