Corporations have long been highly desired by EMTN and ECP dealers. Outside of the loan market, company borrowers have typically relied on public, syndicated deals rather than smaller EMTNs or short term ECP.
However, there were signs of change in 2012 with EMTNs and ECP benefitting from the wider trend for corporations to move from increasingly expensive bank lending into the capital markets.
Corporate issuers had placed $30.5bn of EMTNs as of December 3 2012, the largest volume since 2009, according to Dealogic. New issuers joined the fray during the year, helping to boost the volumes. Their sense of adventure was often rewarded with strong investor demand.
"A lot more corporates have moved from bank lending into the capital markets but there is still a lack of supply, despite heavy demand," says Henry Coyle, head of MTNs and EMEA CP at Royal Bank of Scotland.
He points to a key advantage that privately placed MTNs can offer corporates. "Regular issuers such as BMW can use private placements to flatten their redemption curve, so if circumstances beyond their control lead to poorer funding conditions, they are not forced to issue to cover redemptions."
Lanxess, a German chemicals company, sold its first private placements in March 2012. The firm placed a pair of 100m notes with tenors of 10 and 15 years.
"We were able to push out our tenors and gain attractive pricing with private placements," says Christoph Koch, head of treasury at Lanxess. "That was especially true of the 15 year private placement. It would be difficult for a triple-B chemical name to sell 15 year debt via a public deal. For very long dated paper private placements seem to be the right instrument."
The firms 15 year note was priced 15bp-20bp cheaper than an equivalent public deal would have been, says Koch.
But despite these advantages, many corporate treasurers remain reluctant to launch EMTN programmes. "Time constraints, lack of resources and documentation issues can stop corporate issuers from considering private placements," says Amaury Gossé, MTN director at Citi. "Some of their needs are big and their treasury teams dont want to be bothered with small sized placements."
Instead, the driver behind last years increased corporate issuance came from the demand side, says Gossé. "The lack of alternatives has forced investors that hadnt looked at corporations before to change their attitude," he says. "A few key players across the globe changing their position forced dealers to go out and pitch harder to potential corporate issuers."
Short term supply
Corporations have also gained ground in ECP. Money market funds one of the main buyers of short term debt saw their pool of investable products shrink in 2012 as banks and sovereigns suffered downgrades, meaning corporations became more important to them. Additionally, the European Central Banks long term refinancing operations in December 2011 and February 2012 brought banks levels tighter into line with corporations.
Meanwhile, in peripheral Europe many corporations performed better than their financial counterparts, in part because they avoided many of the rating downgrades that hurt the banking sector in 2012.
"Peripheral corporations did perform quite well, Spanish and Italian credits particularly," says Kieran Davis, head of European short-term credit trading at Barclays. "From October there was definitely a noticeable increase in volumes. It was a rehash of 2011 where banks underperformed but corporations were strong."
However, whether 2013 will record similar success is open to debate.
"Corporate flow will remain similar this year," says Ian Bedford, a director on the syndicate desk at RBS. "Corporations cashflow management is structured in such a way that they arent always able to issue just because the opportunity is there and they can use term funding, which is on fire at the moment."
Davis thinks it will be a good year. "Corporations could have a good year as they come off the loan drug," he says. "It feels like liquidity and investor support would be very good. It is mostly a euro market for corporations and its mostly low single-A and below corporations that are looking to the front end to grow outstandings."
EMTN dealers are also hopeful that their efforts over 2012 will bear more fruit in 2013."Weve sought out corporate issuers more than before and its a virtuous circle as well," says Gossé. "The more trades being done, the more CFOs and treasurers will talk and wonder why theyre not doing it as well."