Europe’s Borrowers Brace for Death of Easy Money

Bankers and borrowers are bracing themselves for a difficult year selling eurobonds now that the days of easy money are coming to an end.

January’s often the busiest month of the year for new bond sales, but as credit markets lose their biggest backer and political threats loom—including Brexit, Italian fiscal angst, and trade woes—companies must wise up to 2019’s primary-market challenges. In vogue: opportunism, front-loaded issuance, and higher borrowing costs.

“The year as a whole will be window-driven, but many will try to access the market in January,” says Duane Elgey, a debt syndicate director at Societe Generale SA. “Once it is accepted that spreads are not returning to early-2018 levels, there will be a number of deals coming back to market.”

That’s a picture similar to the last weeks of 2018, as financial conditions have worsened and borrowing costs increased as credit investors react to rising U.S. rates and the end of the European Central Bank’s (ECB’s) stimulus program.

“What we have experienced for the first time in many years is: If it’s a bad market, it means there is execution risk. People are acutely aware of that and want to avoid that type of market,” says Frazer Ross, Deutsche Bank AG’s head of EMEA investment-grade credit bond syndicate. January could be “very hit and miss,” and a lack of jumbo merger-and-acquisition (M&A) activity could also stymie sales, he said.

Pulled Deals

German car-parts maker ZF Friedrichshafen AG and payment processing firm Ingenico Group both postponed deals in the past couple of months citing market conditions. Chocolate maker Barry Callebaut AG and U.S.-based Emerson Electric Co. are both yet to offer bonds, even though they have met with investors for potential deals.

Sales of new bonds dropped about 18 percent in 2018, to 227 billion euros (US$256 billion), according to data compiled by Bloomberg, with SAP SE selling probably the last corporate deal of the year on December 3. Closure of the market in December may mean there are more borrowers now on the sidelines and looking to sell bonds next month.

January issuers could be the first in more than two years to miss out on the ECB’s Corporate Sector Purchase Programme, as the central bank will end 2.6 trillion euros of quantitative easing at year-end. That tally includes buying nearly 180 billion euros of corporate bonds in primary and secondary markets.

The central bank is set to reinvest asset proceeds as they mature, although it’s not yet clear what the mix will be between new bonds and secondary market purchases. Bonds maturing next month include securities from BMW Finance NV, BASF SE and Orange SA, data compiled by Bloomberg show. BMW has often been one of the first issuers in the market each January.

If market conditions are good enough, next month may be even busier than is normal for January, says Patrick Wuytens, head of high-grade syndicate at ING Groep NV. “Issuers should better prepare themselves for a potential window,” he says.

Brexit Risk

Getting in early may help issuers avoid volatility around looming risks, such as the U.K.’s March 29 exit from the European Union. This list of geopolitical dangers could also easily scupper even modest expectations for primary sales next year.

“The biggest concern is a lack of resolution,” says Mariano Goldfischer, global head of syndicate at Credit Agricole CIB. “You can analyze company fundamentals, but the uncertainty of the political landscape could derail everything.”

With so many uncertainties, there’s no consensus on how many corporate bonds will be sold in Europe next year. Barclays Plc and JPMorgan Chase & Co. analysts expect issuance to rise over this year, while UniCredit SpA’s market watchers see volumes shrinking. BNP Paribas SA and Morgan Stanley predict broadly unchanged volumes on this year.

The end of ECB support has contributed to a jump in borrowing costs this year. Average euro investment-grade corporate spreads have surged 75 percent this year, to 151 basis points, the highest in nearly three years, Bloomberg Barclays index data show. Issuers will just have to accept that they aren’t going down again anytime soon, according to Suki Mann, founder of Creditmarketdaily.com.

“Yields are higher and spreads are wider and costs to fund are elevated,” he says. “We will have reset the bar higher come 2019.”

From: Bloomberg

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