Corporate issuers have access to attractive funding while investors are pleased credit quality is improving. Only debt capital markets bankers are suffering, says Clare O'Callaghan.
Corporate debt capital market bankers have had a difficult job so far this year persuading borrowers that do not need the money to take advantage of the attractive terms on offer.
Supply is down 50% for the first eight months of 2004 compared to the same period last year, according to Barclays Capital. The reason: companies are cash rich and investment growth is subdued.
?We had a bumper year last year with significant new issuance volumes and we expected supply to be down from that level,? says Miles Millard, co-head of cross-product European corporate origination at Deutsche Bank. ?But no one predicted volumes to be as low as they have been.?
At the beginning of the year many people predicted an increase in debt-funded mergers and acquisitions, but that has failed to materialise.
Chris van Niekerk, head of European corporate debt capital markets at Barclays Capital in London, says investment in new projects or M&A is hard to anticipate. ?With signs of a more positive economic backdrop, corporate managements are naturally now considering what their next big investment will be and when they are going to make it,? he says.
?Although it makes sense for corporate treasurers to consider prefunding in good market conditions, they will be more minded to take this route if there is a good level of confidence regarding the likely timing of investment.?
The lack of supply means a number of banks are buying themselves into the market resulting in too many parties chasing too little business, says Justin May, global head of corporate debt capital markets at ABN Amro in London. ?Sole-led MTN trades are dropping between 10 and 20 cents, however some institutions seem willing to pay such costs to buy business,? he says.
Up, up and away?
Frazer Ross, director of debt syndicate at Deutsche Bank in London, says many investors were bearish on credit spreads at the start of the year and did not get involved in new issues.
?They took the view they would be cheaper in the months following their launch,? he says. ?This view has changed as the year has gone on and spreads have continued to rally.?
Marco Baldini, corporate syndicate official at Barclays Capital in London, identifies the growth of the corporate FRN market as a key trend of 2004.
|Bookrunner league table of euro denominated corporate/utilities debt (January 1-Sep 9, 2004)|
|Rank||Bank||Total (Eu m)||Issues||Share %|
|8||Dresdner Kleinwort Wasserstein||4,245.83||17||4.88|
|9||Credit Suisse First Boston||3,969.08||28||4.56|
|Total of issues used in the table||87,050.08||368||100.00|
?No one thought there was a deep market for 100% risk-weighted FRNs,? he says. ?However, in a rising interest rate environment FRNs make sense regardless of what risk weighting they may have. They have proved liquid instruments and have been widely traded after launch with significant follow-on retail buying especially when trading under par.?
Debut borrowers such as TPSA and Amcor have benefited from the lack of supply and have been able to access the market in smaller sizes.
?In the past it was not possible to come to the market for less than Eu500m and issuers had to invest the excess cash if they only needed Eu300m,? says Deutsche's Ross. ?However, the lack of supply means smaller deals are becoming more accepted.?
Value for money?
Credit spreads are expected to remain stable in the final quarter, with limited room for further tightening.
?If you look at a 12 month spread range for corporates by sector,? ABN's May says, ?with the exception of autos, every sector is at the tightest end of the 12 month range. Valuation concerns are increasingly real. Investors are not looking to increase their appetite for risk at these levels.?
Etienne Gorgeon at Axa Investment Managers in Paris believes picking stocks is less relevant as relative value diminishes. ?We are in a low yield environment, the yield curve is steep and there is a huge amount of liquidity available. [As an investor] we have been longer down the credit curve as spread at the short end went incredibly expensive.?
Gorgeon takes comfort from the low level of defaults and strong cash generation. The cash/debt ratio for non-financial US companies is the highest it has been since 1969, according to Moody's.
While some in the corporate market believe issuers will be unable to ignore the excellent funding conditions on offer in the final quarter, others are less bullish. ?There is no substantial impetus for issuance volumes to increase, unless M&A activity picks up or we witness a significant increase in capex,? May says. ?Redemptions are high but companies are continuing to deleverage and many corporates are now cash rich.?
Bankers, unable to persuade issuers to raise funds they do not need, have sold a number of companies on liability management.
Peter Charles, head of corporate syndicate at Citigroup in London, says there is a greater focus from the syndicate desk and DCM on buybacks, tenders and exchange offers.
Corporates are likely to continue returning excess cash to equity investors through dividends or share or debt buybacks.
?There will be continued liability management activity but we will have to wait for strategic corporate activity to pick up before we see a significant increase in new issuance,? says Charles.