Corporate borrowers have been increasingly eschewing the medium term note market in favour of raising funds in the syndicated bond market.
And who can blame them? The public market has been red hot, allowing corporate treasurers to source large amounts of funding at ever lower yields.
For investors too, the value MTNs provide is limited. “The public market has been preferable for a few years now because it is generally perceived as a more liquid market,” says Martin Gipp, head of long term funding at Helaba in Frankfurt.
The European Central Bank’s activities have played a major role in ensuring corporations have cheap sources of capital.
“The ECB’s Corporate Sector Purchase Programme has pushed new issue premiums and yields down to such attractive levels that, for corporate issuers, there was simply no pricing advantage in doing reverse enquiry MTN issuance,” says Richard Proudlove, head of MTNs and private placements at ING in London.
New opportunities for MTNs
But as the ECB prepares to wind down quantitative easing, bankers are beginning to examine what the world will look like in its wake.
Some in the MTN market believe that the higher new issue premiums investors will demand in the public market will create new opportunities for MTNs to provide issuers with price arbitrage. But Gipp does not foresee the end of the purchasing programme “leading to a change in issuers’ decision to use the public or private market”.
In spite of the ECB’s support of the public market, MTNs still provide an important source of funding. Outside the conventional benchmark maturities, three years up to around 12 years, corporate treasurers must turn to the private placement market to raise capital.
However, both the short end and the long end of the curve are under pressure. “Short end spreads are at record lows,” says Stefan Kleine, MTN syndicate official at BNP Paribas in London. “Many corporates will pay negative interest rates.”
Changing mood
The low yield environment has made long dated notes an attractive option, particularly for insurance companies chasing yield targets, but the mood is changing.
Most expect rates to climb this year, meaning that long tenors are likely to become less popular with investors.
In any case, companies are finding it difficult to access the market at long tenors, thanks to regulation. “Insurance companies are increasingly reluctant to buy corporate credit because of Solvency II risk weightings,” says Kleine.
The MTN market has long been a source of niche currencies — those outside the big core four of dollars, euros, yen and sterling. It is generally difficult to put together a syndicated benchmark deal in non-core currencies, so corporations with funding needs in such currencies have generally relied upon the cross-currency swap market to obtain the local cash they need.
However, this is an unreliable and increasingly expensive exercise. “Uncollateralised swaps are expensive for corporates so it is becoming more advantageous to meet local currency funding needs via local currency MTN issuance rather than doing a dollar or euro benchmark and swapping into the local currency,” says Proudlove.
Multinational corporates meeting local currency needs in the MTN market rather than the swap market are likely to become more prevalent throughout 2017, according to three London-based MTN bankers.
The corporate MTN world has also been under pressure from regulators. The EU Market Abuse Regulation (MAR), which took effect in July 2016, is still being digested by the MTN community.
While the well-established curves of public sector borrowers mean that pricing information is unambiguously considered public knowledge, for irregular corporate issuers, the situation is much less clear.
“The EU Market Abuse Regulation introduced new non-inside information market sounding requirements that place new obligations on dealers, issuers and investors,” says Proudlove. “This new market sounding requirement is particularly relevant for the less frequent corporate borrowers and has added another layer of complexity in issuing MTN private placements versus public bonds.”
An extra layer of complexity is the last thing corporate treasurers interested in MTN issuance need. “Treasury teams often don’t have the time to focus on smaller deals,” says Konrad Merkofer, director in UniCredit’s MTN and private placement syndicate team in London. “Usually they want to get €50m or more as a minimum size, but standard investment size is often smaller.”