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For corporate bond investors, autumn offers an ECB rock and a hard place


Europe’s corporate bond market is back in action this week with new deals. But it will be no picnic for investors. The market is awash with cash and new issues in the months ahead will be painfully expensive.

Vodafone, the UK mobile phone company, flicked the switch to start the post-summer European primary bond market on Monday with a €2bn hybrid capital issue, split between 60 year non-call six and non-call 10 year maturities. This was quickly followed on Tuesday by hybrids from Belgian chemicals company Solvay and Austrian oil major OMV.

The deals all obtained sizeable books. Vodafone garnered €7bn of demand at guidance, allowing it to print €2bn; Solvay €3.2bn — for a smaller deal of €500m — and OMV €5.5bn for a €1.25bn trade.

Big books have brought confident syndicate managers and treasurers. Vodafone priced roughly flat to its curve, while Solvay looks to be coming a few basis points inside fair value. 

This is something investors should get used to as 2020 heads into its shorter than usual issuance window before the US presidential elections in November.

Europe’s corporate bond market has money being thrown at it from all angles. The biggest wallet in the room belongs to the European Central Bank, which has sent spreads grinding ever tighter since announcing its Pandemic Emergency Purchase Programme in March. 

Added to this, however, is the consistent inflow of money into investment grade corporate funds this year, as investors have been put off by the minuscule spreads in public sector bonds and are worried about the rising possibility of defaults in high yield. 

The height of summer brought the 19th week of continuous, sizeable inflows into European high grade corporate debt. In the middle week of August up to the 14th, €1.77bn came in from retail investors in euros alone. Europe’s other major fixed income asset classes received only marginal inflows.

But the summer has provided few outlets for investors to spend this extra money. Vodafone’s trade was the biggest in the market for two months and there had not been any investment grade issuance for a fortnight. 

Syndicate bankers are not expecting the rest of the year to be particularly busy, either. If anything, there is a sense it will be quieter than usual because so many companies are already full of funding and hunkering down until economies recover. 

This only compounds the downward pressure on spreads and new issue premiums. As more money comes in, yet with fewer deals to purchase, the issuers on screens can expect to get a very enjoyable ride. 

On the plus side for investors, the excess money means deals should perform well in secondary markets. 

Nonetheless, it will still be galling for fund managers to have to accept negligible new issue premiums on spreads that have already come down substantially. But there is so much money in the market that they won’t have any choice.