The ECB has got capital markets' back, having restarted quantitative easing, and rates are set to stay low or drop even lower over the next year. It should, therefore, be a vintage year for borrowers of all stripes as far as absolute cost of funds is concerned — so low, in fact, that we might have to find a new name for high yield bonds. Many emerging market names, having had a cracking 2019, are now borrowing at rates their developed market peers used only to dream of.
But don't be fooled into thinking markets will be easy. Volatility, as September’s spike in repo rates and the US’s blunt approach to diplomacy in January showed, has not been abolished just because central banks are flooding the market with bond purchases again. In fact, markets seem more fragile than ever — and the fractures are less easily explained. Some point the finger at a generalised lack of liquidity, which may have been exacerbated by central banks sucking up lakes of bonds. Nasty surprises are becoming increasingly normal.
Financial markets are poised uncannily between heaven and hell — or at least, limbo. The US stock market reached record highs, after its strongest year since 2013.
But at the same time, fears of a global downturn persist. The world’s two biggest markets are at open economic war, with disruptive effects the world over. US president Donald Trump may ramp up his rhetoric as he seeks re-election in November. Some of the air has gone out of even Europe’s limp recovery.
Rates markets are dithering too. Some think the US economy is stronger than first thought, and the market is pricing in too much in the way of dollar rate cuts. Others reckon growth will slip further, part of a secular trend caused by the slowing Chinese economy.
With such contrasting views, volatility is a given in 2020. Investors will move cash around as their confidence ebbs and flows. For capital markets, that means issuance windows will open and close in the blink of a syndicate banker’s eye.
2020 will be the year when digital technology finally makes its next big mark on debt capital markets. Quite how disruptive it will be remains to be seen. The impact will start in public sector bonds. The ECB-run European Distribution of Debt Instruments, a platform for issuing public sector debt, is likely to be unleashed after a consultation. Meanwhile, private sector initiatives will be competing with a variety of offerings, including agora, Nivaura and Origin. Banks, not wanting to cede control to artificial intelligence and blockchain fintechs, will push their own issuance platforms. DirectBooks, a venture spearheaded by Wall Street banks, will become a household name.
Europe is under new management — a new president of the Commission, a new head of the European Central Bank. They should bring new energy and focus to a bloc that has been distracted by Brexit and hamstrung by persistently low growth. Ursula von der Leyen’s European Green Deal and Christine Lagarde’s view that climate change is “mission-critical” are new and ambitious ideas. But they also have a golden chance to reinvigorate the EU’s slow-moving Capital Markets Union project, and it is quite clear European policymakers want to accelerate it. With the bloc’s largest and only genuinely global capital market leaving the Union (probably at the end of January), and a dislocated banking system out-fought by Wall Street banks, CMU has never been more urgent.
Transition bond conundrum
A great leap forward for the sustainable finance bond market or a backward step? Since Marfrig’s trailblazer in the summer, transition bonds have split the market down the middle. To many they are a necessary innovation — allowing non-green companies cleaning up their acts to access specialised investors to finance their transitions. Others decry them as greenwashing. The Green Bond Principles are likely to pass down their guidance soon. Meanwhile, sustainability-linked bond structures have arrived. Expect the mechanism to spread in 2020 — though not all green bond enthusiasts are wild about them.
After Aramco: get real on price
Forget Aramco. That was always going to end in tears. Even Wall Street’s hype machine was bound to come unstuck when serving a government too proud to compromise on price. But the lesson is that all IPO sellers are going to struggle to sell deals at inflated valuations. Investors have shown they are willing to buy sales of stock in listed companies, but will not gamble on new names without hefty discounts. More issuers might shun the IPO process altogether, finding it too cumbersome and fragile, and go for direct listings or demergers instead.
The Single Resolution Board will finally be letting European banks know their targets for bail-in capital, which include subordination requirements. Depending on how these targets are calibrated, banks might have lots of capital to issue — as much as €330bn over the next three years.
Private pleasure, public pain
Private capital markets mean many things to many people in Europe. Leveraged direct lending, off-market equity investing, alternative credit, Schuldscheine, US Private Placements. It’s sometimes confusing but what all these markets have in common is a great performance post-crisis, in terms of expansion and returns.
Preqin says Europe-based private debt assets have grown from €24bn in 2008 to €135bn in 2018; direct lending is now the fastest growing asset class in European credit, according to Deloitte. Proponents argue all these products are here to stay — and will grow as genuine rivals to public bonds, syndicated and bilateral bank loans and equity capital markets. Some even argue that credit funds might soften economic downturns because they are incentivised to keep the debt taps flowing in tough economic times.
But behind the optimism is the nagging worry that these products have only flourished because of ultra-low interest rates and the desperation for yield and allocation, and that they are major contributors to the dangerously large corporate debt bubble.
The Libor alarm is set for January 2021. But will the capital markets force regulators to hit the snooze button? When Andrew Bailey, as chief executive of the Financial Conduct Authority before being named the new governor of the Bank of England in December, tolled the death knell for the benchmark in 2017 there seemed plenty of time to come up with a new set of reference rates and get them working seamlessly. Instead, the closer the deadline comes, the more horrendously complicated — perhaps even impossible — such a swap appears. Now, after two years of developing Sonia, €str and Sofr, there are increasingly loud calls for Libor to be saved.
Intro by Ralph Sinclair