The first corporate bond deal of 2021 set the tone for the rest of the year. The finance division of German car company BMW sold €1.5bn of 2026 and 2033 dated bonds on January 4, having attracted €7.3bn of demand. Both tranches came flat or slightly through the curve. Similar results continued throughout the year for issuers across the ratings spectrum.
“Our funding cost continuously saw very attractive levels, with credit spreads offering an almost flat curve to us,” says Fredrik Altmann, director of corporate finance at BMW. “There is still ample liquidity in the respective capital markets [and] our order books have been decently covered.”
The favourable conditions hit a few patchy spots — when inflation started rising in the spring, for example, or when the rates market became increasingly volatile over the autumn — but conditions were mostly highly beneficial to borrowers, giving those that were willing to put their heads above the parapet the chance to scoop up company record deals.
Dutch transmission system operator Tennet sold its largest ever deal in 2021, with a €1.8bn triple tranche trade split across 6.5, 10 and 20 year maturities. It came back in November to print a €1bn long 13 year note – its largest ever single tranche.
“The favourable supply and demand dynamic enabled us to achieve new milestones with our forays into the bond market this year,” says Gerard Kits, head of treasury at Tennet. “We have also been able to price our bonds favourably despite issuing in the market twice this year, highlighting the opportune dynamic for regular issuers like ourselves.”
The strong conditions also allowed debut names to come to the market, frequently with spectacular results. German residential real estate company Howoge, rated A/AA-, rode a wave of demand for low beta, defensive issuance in October to sell a €1.7bn debut deal from €9.5bn of demand.
The deal “establishes Howoge’s access to the capital markets,” says Thomas Felgenhaur, Howoge chief financial officer, who adds that future capital markets issuance will be used to “sustainably support social housing construction in Berlin”.
Access to the bond market also lets the company “significantly reduce its current refinancing costs and keep rents stable”, added Felgenhauer.
Supply fall
Despite the stellar opportunities available to borrowers throughout most of the year, demand for debt dwarfed supply. Issuance from investment grade corporates in euros was €365bn by mid-November, according to Dealogic. A year earlier saw €499bn printed by the end of November, while 2019 clocked up €403bn in the same period.
At the same time, money poured into credit funds, leaving investors complaining of being awash with cash with few places to put it. Anecdotally, available bonds became increasingly scarce in the secondary market as the year went on, with investors clinging on to their allocations and snapping up anything that became available before it fell into the all-encompassing and price-insensitive vacuum of the European Central Bank’s Corporate Sector Purchase Programme.
In 2022, unless the spread of the Omicron variant of the coronavirus dictates otherwise, a return to normality is anticipated for corporate spending, with capex plans being ramped up. Royal Dutch Shell, for example, is expected to spend $3bn more in 2022 than 2021, while Total is expected to spend around $2bn more than the $13bn in 2021 capex, going from the companies’ respective third quarter results presentations.
With increased spending comes more bond supply, swinging the pendulum back in the favour of investors, and likely widening spreads.
Adding more pressure to spreads is stubbornly high inflation across the West, as supply chain problems and labour shortages meet sharply rising energy prices.
With inflation running at 6.2% in the US in October, a 30 year high, at 4.1% in the eurozone, a 13 year high, and expected to hit 4.5% in the UK by April 2022, issuers are keeping a close eye on how central banks might act.
“The increased rates and broader market volatility has been, at times, challenging to navigate in terms of pinpointing ideal windows for market access,” says Kits at Tennet.
“A macro event that is expected to be a non-event by the market consensus may not turn out to be exactly that, which challenges issuers and their bankers to prepare for the unexpected.”
Central bank shocks
One of those non-events came in the final quarter, with the Bank of England keeping its rate unchanged after its November 4 meeting, defying widespread market expectation of a rate rise in response to higher inflation. The shock sent 10 year Gilt yields tumbling and sterling selling off against the euro. For sterling funded corporates, the background noise meant they had to sit out of the market for a few weeks and wait for conditions to stabilise.
Volatility died down less than a week later, and issuers such as Derwent London and TP ICAP were able to print successful deals in the currency. But it was a stark reminder to issuers about the hold that central banks have over the corporate bond market even when central banks decide to sit on their hands and change nothing
The year ahead will almost certainly bring moves by central banks. The BoE is expected to raise its base rate twice, after an expected increase in December. Soaring inflation in the US means the Fed is set to raise rates by next summer, after starting to taper its Treasury and mortgage bond purchases in December.
ECB president Christine Lagarde has said that it is unlikely there will be rate rises in 2022, but the Bank will wrap up its Pandemic Emergency Purchase Programme in March. While this programme has almost exclusively focused on public sector debt, it still causes some liquidity to drain out of the market at the periphery, putting upward pressure on corporate credit spreads.
“Market sentiment in 2022 in general will be highly depend on central bank positioning,” says Altmann at BMW. “We will closely monitor the investment flows in the respective markets, as this is one major driver of our credit spreads.”
For a company with a large financial services arm with interest bearing assets like BMW, credit spreads “are of more importance than total yield”, says Altmann, “because of the nature of what we refinance”.
Green rockets
As well as central bank influence, a continuing trend for 2022 will be the sustained rise of environmental, social and governance finance.
Debt related to green endeavours fell slightly out of favour with corporate bond investors in the closing weeks of 2021, with new issue concessions rising to the double digits for green deals. Some of this was due to the sharp rise in supply. Sustainable bonds are, according to Moody’s, on course to top $1tr of annual issuance for 2021 — a record.
“One of the most obvious and growing opportunities is the ever-growing bid for sustainable bonds,” says Kits at Tennet. “It is certainly helpful to have a strong following and credentials in this regard, as investors increasingly differentiate between the ‘haves’ and ‘have-nots’.”
Tennet, which issued its first green bond in 2015 and has been a regular issuer in the structure since, would likely consider itself one of the ‘haves’.
But even issuers with plenty of data points on their green curve need to remain nimble going into 2022.
2021 was the first full year under the European Union’s Taxonomy for Sustainable Activities, and borrowers will have to stay on top of their frameworks to remain compliant.
Most recently, there has been pressure for gas and nuclear energies to be added to the Taxonomy, a possibility that a spokesperson for non-governmental organisation World Wide Fund for Nature called “a scientific disgrace that would deal a fatal blow to the Taxonomy”.
“Our Green Financing Framework has been set up with the aim to continuously respond to changes in the industry and best market practices and expectations,” says Kits at Tennet
“As such, the intention will also be to consider alignment of the framework with the EU Taxonomy/EU Green Bond Standards once these are finalised.”
Adding to the corporate ESG supply in 2022 will be a growing number of issuers announcing, frequently with great fanfare, that they are switching their entire bond programme to ESG-related issuance. Total made such an announcement in 2021, as did Enel in 2019.
This will likely increase supply and shrink the spread benefit that corporate issuers can expect from ESG issuance even further.
Not that this is a problem for everyone. “Personally, I do not believe in the concept of a ‘greenium’,” says Altmann at BMW.
Even if companies do not switch their entire debt stack to ESG, the focus that treasurers are putting on ESG credentials cannot be understated. It is now commonplace to see ESG slides prominently displayed in a bond’s market materials, even if the bond is conventional.
“We have taken a holistic approach towards sustainability,” says Altmann. BMW issues a mix of conventional and labelled bonds. “Financing only single projects or activities with ‘green’ labelled financial products is too short-sighted,” he says. “A green bond does not imply anything about a company’s sustainability performance.”
He adds that “every investment in the BMW Group is a sustainable investment — even without a green label. We are in constant dialogue with both ESG focused investors as well as mainstream investors. We receive positive feedback on this approach, including participation of ESG-investors in our bonds.” GC