FIG in figures: a meaner but greener year
Financial institutions made the most of challenging conditions in 2021, pushing ESG supply to new heights and breaking pricing records in several asset classes. By Tyler Davies
Capital markets were increasingly turbulent in the final stages of 2021, as rates sold off on the back of fears about how central banks might respond to surging inflation during the recovery from the coronavirus pandemic.
More deals were pulled or postponed, and many borrowers had to make do with printing deals in line with their initial price thoughts.
However, it would be wrong to let recent uncertainty cloud judgment of the year as a whole. Issuers have still enjoyed highly favourable market conditions, which they have used to their advantage.
Spreads have also remained very tight when viewed on a historical basis, with several issuers even managing to push into negative yield territory in the senior market.
“It could be a mirror image [in 2022] because it’s hard to see how credit can trade much tighter than it does now,” says Christopher Bond, head of FIG DCM, EMEA at BNP Paribas. “There is clearly more downside risk during the process of central banks removing stimulus, but they will also be watching to make sure markets don’t become too dislocated.”
Amid all the debate about global economic and monetary conditions, financial institutions have also found room for innovation in the market, including by structuring the sector’s first sustainability-linked bond deals.
And market participants have all the while been busy adapting to a new way of working — one that blends in-person meetings with more online interactions and teleconferencing calls.
GlobalCapital highlights key trends in the FIG bond market over the last year in a series of charts below. The Primary Market Monitor data are derived from a store of proprietorial new issue information compiled over recent years.
The market is getting trickier: moves from initial price thoughts and order subscription ratios have fallen year on year
FIG bond prices rebounded very quickly after plummeting during the height of the pandemic in 2020, and they carried on rallying strongly towards the beginning of 2021.
This has been great news for borrowers, who have continued to fund themselves at record low spreads. But investors are growing increasingly frustrated with stretched valuations. They started a small resistance in 2021, which has gathered pace as uncertainty has grown over the future for central bank policy.
The results are beginning to show up in primary markets, where order book sizes are shrinking as funds debate how best to invest their cash.
New issue premiums have also risen, and many borrowers have also enjoyed less momentum when pricing new deals, meaning they can no longer tighten spreads as much as they could in the past.
No asset class has escaped the pushback, but some — including tier twos — have suffered more than others.
The market is becoming greener: ESG issuance is gaining a greater share of overall FIG supply
FIG borrowers have been very busy bringing use of proceeds transactions into the market over the last year.
As of mid-November, they had supplied about €36bn of ESG issuance from 60 different senior deals in euros, according to GlobalCapital data. The figure is more than double the €17bn of supply that financial institutions managed in 2020, from 26 transactions.
ESG bonds now make up roughly a quarter of overall FIG senior supply in euros. In 2020, they accounted for about 12%.
Market participants are doubtful that the growth in labelled issuance can carry on at the same pace in 2022, given the difficulty that many banks face in trying to identify more green and social assets.
The EU’s Taxonomy and new green bond standards could also introduce stricter eligibility criteria, which may make it harder for borrowers to really ramp up their supply.
But with increasing focus on the need for financial institutions to green their balance sheets and reach net zero targets, ESG themes will clearly continue to play a large role in bank funding programmes.
Borrowers will also have noticed that labelled issuance continues to outperform the conventional counterparts. Even through the toughest periods of 2021, ESG transactions have benefitted from smaller premiums, higher subscription rates and larger moves from initial price thoughts.
The market is still testing new lows: the average euro AT1 coupon dropped lower again this year
Additional tier ones (AT1s) have been on a one-way journey since they were created as an asset class in 2014/2015. Yields and spreads have fallen steadily as the market has matured, with more investors coming to understand the value of the instruments.
Demand dynamics have of course been improved by the fact that funds have been hunting for returns in a lower for longer interest rate environment. But that could all be set for change in 2022, as central banks think about pushing rates up in response to the pandemic recovery.
Higher rates would automatically lead to higher AT1 coupons, a trend that has already been in evidence in the second half of 2021. But, on the whole, this last year has presented another great opportunity for banks to gather cheap sources of debt capital.
In euros, the average AT1 coupon rate in euros fell to 4.8% from 5.3% in 2020. La Banque Postale even threatened to break into the 2% area in September, when it set a record low in the currency with a €750m perpetual non-call 7.5 year priced at 3%.
For more FIG data see Primary Market Monitor review. GC