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Overview — Covid and the Capital Markets: What a difference a Pepp makes

President of the European Central Bank Christine Lagarde bumps fists with Greek Finance Minister Christos Staikouras as they attend a Euro zone finance ministers meeting in Luxembourg, October 4, 2021. REUTERS/Yves Herman

Ralph Sinclair looks at how three core capital markets have fared since the pandemic began, using our proprietorial Primary Market Monitor data to assess overall volumes, oversubscription levels, pricing movements and new issue premiums. The data gives, we think, a unique view on the bond market conditions that borrowers, investors and bankers have had to deal with over the past 18 months. Here we look at syndicated sovereign bonds

SOVEREIGN SYNDICATED BONDS

Execution of syndicated senior debt normalises

The GlobalCapital Primary Market Monitor records data that gives an insight into funding conditions in the syndicated primary bond market by gauging how well subscribed syndicated new issues are, what premiums issuers are paying and how much lead managers are able to move pricing during execution.

With data going back to the start of 2020, just before the pandemic hit, the swathe of central bank support embodied by the European Central Bank’s Pandemic Emergency Purchase Programme (Pepp), which was announced at the end of that March, did enough to lower yields to ease governments’ path to borrowing money in the public bond market. This is despite the sharp increase in sovereign borrowing requirements as governments sought to fund emergency spending to combat the socio-economic and medical devastation brought about by the coronavirus and subsequent lockdowns.

Western governments issued on average $22.6bn-equivalent of syndicated bonds per month in the three months until the Pepp and other measures were unleashed. Since then, they have issued on average $29.9bn-equivalent of syndicated debt each month up until the end of October. They have done it by issuing bigger deals, compared with pre-pandemic — on average 5.1 syndications a month since the end of March 2020 versus 5.7 before — and perhaps by paying barely any more new issue premium to boot, despite the uncertainty that has characterised the era.

The most popular maturity bucket for government issuance both in the first quarter of 2020 and since has been the seven to 10 year sector. Over five deals issued in this bracket before the Pepp was launched, Western sovereigns paid an average new issue premium of 1.7bp on each deal. Since then, they have paid average new issue premium of just 0.5bp more for the same product.

Demand has risen too — boosted by quantitative easing. For those same deals, the average oversubscription ratio was 5.6 times before Pepp and 6.7 times since. For syndicated deals of more than 30 years — bought traditionally by a smaller set of investors — the average subscription ratio has risen from 7.8 times at the start of 2020 to 9.4 times since.

But the data also suggests that sovereigns have been able to achieve bigger syndications at longer maturities since the advent of central bank pandemic countermeasures.

Western sovereigns raised, on average, $2.8bn with each syndicated 12-15 year deal done before Pepp: $2.1bn with each 15-20 year syndication, $3.3bn in deals of 20-30 year maturity and $4.4bn in anything longer. Since Pepp, those average syndication sizes have risen to $5.8bn, $7.7bn, $5.9bn and $5.5bn, respectively.

That has also meant a fee bonanza for banks in the market, which have been mandated for more deals and of greater size and duration on average.

Western sovereigns have paid estimated fees of €423m for their euro and dollar syndications so far in 2021, according to GlobalCapital analysis of Dealogic data. For the whole of 2020, when borrowing requirements surged in the pandemic, they paid an estimated €529m. That compares with €202m and €249m in 2018 and 2019, respectively.



FIG SENIOR BONDS

Execution of syndicated senior debt normalises

For all the chaos of the pandemic and the extraordinary funding that central banks have extended commercial lenders, GlobalCapital’s Primary Market Monitor shows just how stable issuance has been for some banks raising senior public funding

Banks from the UK, France, Germany, Italy, Spain and the Netherlands have, overall, had a remarkably consistent time of it when it has come to syndicated senior issuance since the beginning of 2020.

They raised $95bn-equivalent of senior debt in public markets in euros, dollars and sterling in the first nine months of 2020. In 2021 so far, they have raised $97.9bn.

Yet that period encapsulates the wild volatility of the start of the pandemic as well as all of the extraordinary support measures that governments and central banks put in place to nullify the worst effects of the pandemic and lockdowns on bank balance sheets — keen as they were to avoid any of the liquidity and credit problems that drove the 2008 financial crisis.

But a closer look at the Primary Market Monitor data shows that banks from some countries had to offer greater spreads to entice bigger order books, even if the final price was by some distance tighter than the starting point.

Italian banks, for example, attracted on average orders of 3.1 times the deal size in the first three months of 2020, moving pricing — again on average — 24bp tighter during execution. This at a time when Italy was suffering far worse from the pandemic than other European countries.

Demand in the second quarter fell relative to deal sizes, with the average senior deal just 1.8 times subscribed but with issuers still able to tighten by 26.3bp on average. Italian lenders spent the rest of the year starting at wider levels — tightening over 40bp on a senior deal on average — but achieving subscription levels over three times the deal size.

But in 2021, conditions have calmed down. In the third quarter, Italian lenders were able to tighten on average 21.9bp during execution, albeit achieving order books of just 2.2 times the deal size on average.

Of the five countries sampled for this article, average subscription ratios for senior debt syndications have been stable since the beginning of 2020 and the end of Q3 2021, hovering between a range of 2.3, attained in the third quarter of 2021, and 3.1, recorded in the final quarter of 2020.

Pricing moves, overall, again now look a lot more like they did when the pandemic began. Banks sampled for this article were able to move pricing on their senior deals, on average 20.6bp during execution during Q3 2021 versus 18bp in Q1 2020 — although it was not stable throughout, with the average move touching 29.6bp during Q2 and Q4 2020. GC



CORPORATE BONDS

New issue premiums creep up in IG bonds

New issue premiums have been rising across Europe’s investment grade corporate bond market over the past 12 months, GlobalCapital’s Primary Market Monitor reveals. Companies are paying up, despite doing smaller deals as demand slides

Such was the power of the European Central Bank’s Corporate Sector Purchase Programme that, despite the uncertain economic outlook late in 2020, corporate borrowers paid, on average, a new issue premium of minus 7.5bp for a bond in November that year, when Primary Market Monitor began collecting data on the corporate primary bond market. This fell further to minus 12.5bp, according to the data, a month later but the figure has risen ever since.

As the economy has started to recover, demand for corporate debt, perhaps strangely, appears to be on the wane in Europe.

Shrinking deal sizes over the past year have done little to maintain price tension. The average corporate new tranche size was €684m in November 2021. It was €567m as of October 2021. There was a spike in August in the average deal size to €792m, but this was driven by a freak €5bn issue from Vonovia across five tranches.

Nonetheless, the average subscription ratio for corporate bonds has fallen. The average corporate bond was 4.7 times subscribed in November 2020. That had fallen to 3.8 times in October 2021 but had gone as low as 2.8 times in July.

That meant that corporate bond syndicates could not drive pricing tighter during execution as they once had. In November 2020, the spread on a new corporate bond was tightened on average by 36.9bp between initial price thoughts and re‑offer. As of October, that was down to 23.2bp on average.

All of which has given corporate bond issuers impetus to pay an increasing spread to fair value on new debt throughout 2021 — a trend that may well accelerate as interest rates rise and monetary policy tightens.

From December 2020 to May 2021, the average new issue premium on a corporate bond rose by 20.5bp. That premium shrank a little over the course of the summer to as low as 0.9bp in July but it has since climbed to 10.2bp in October 2021.

Corporate bond bankers speaking in November blamed investor fatigue for the market’s performance. Even ESG-linked bonds — before, the hottest product in town, which allowed borrowers to achieve large greeniums — were becoming harder to sell, with investors demanding a premium.

Market participants have blamed oversupply but Dealogic data suggests the market was quieter in 2021 than in the past two years. It shows that investment grade corporates supplied €359bn worth of bonds over 773 deals in the first 10 months of 2021. That compared with €482bn in 915 deals for the same period in 2020 and €373bn over 933 deals in 2019. GC

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Ralph Sinclair
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