Europe’s corporate bond market is flashing between on and off in the blink of an eye, as this week proved when six companies spotted the one strong day and crammed in together to raise €5.7bn of debt on Wednesday.
They included an elite borrower, in investors’ eyes — Unilever — several strong single-A and high triple-B companies such as Volvo, Electrolux and Orange, and a large debut for M&A financing from Coloplast, the Danish maker of stoma and wound care products.
The cheer vanished abruptly. Markets started to sell off on Wednesday afternoon, when US consumer price inflation figures for April surprised on the upside, and the next morning misery was back.
The market “couldn’t decide what it wanted to do,” said the head of syndicate at a bank in London on Thursday morning. “It ended up rallying into the close [on Wednesday]; now it has just tanked completely. It’s very unhappy and there will be no respite. The only respite is things carrying on selling off. It’s the only thing that can happen, because clearly people don’t think [bonds are] cheap enough yet.”
New issues were out of the question on Thursday and pretty much all nine tranches issued the day before were trading 5bp-12bp wide of reoffer by the afternoon, one banker said.
The message for issuers could not be clearer. “The market has shifted from issuers to investors,” said Danijel Afolter, who manages Volvo’s funding in Gothenburg. The truck maker raised €500m of 3.3 year bonds on Wednesday. “We know investors have the upper hand. They can be more picky. It’s a question of timing the market.”
Asked how issuers should cope with this market, the head of corporate syndicate at a bank in western Europe said: “Just try to find the days when it’s possible, it’s as simple as that. The only problem is that every time people jump into a window, the next window is bottoming deeper [i.e. at prices worse for investors] than the earlier one, and it repeats itself.”
Lightning changes
There is nothing new about having to time a bond issue carefully — and Afolter said the present conditions reminded him of previous bouts of volatility, such as during the Covid crisis.
What is exceptional about the current market is the speed of changes in sentiment, and the violence of lurches in the underlying market architecture issuers have to use to price bonds.
For much of this year, rates have been volatile, but with a bias to rising, as traders priced in expectations of higher interest rates. But on Thursday, the syndicate banker said: “Rates are going down now. We have really started the stagflation discussion, with fears of an economic outlook which is going into crisis. The 10 year euro swap rate is at 1.66%. It was at 2.02% one or two days ago.”
As the past few weeks had shown, “the individual day has never been more important in terms of getting demand,” said Dominic Kerr, head of European corporate origination at HSBC in London. “You have to be nimble. Last Thursday, Friday and Monday the market was choosing to focus on the negatives from the FOMC and MPC meetings, with recessionary commentary, the China lockdown — and we are not getting away from the Russia-Ukraine war any time soon, or inflationary pressure. It’s about learning to live with those.”
Luck and judgement
With markets turning this way and that so quickly, spotting the good days can be difficult.
“Sometimes it can seem like there’s no rhyme or reason why one day is better — sometimes it’s just an absence of bad news,” Kerr said.
Volvo had got its MTN programme ready to issue on Friday, and had been watching the market carefully since then. It issued a Skr2.2bn deal on Tuesday, which Afolter admitted had not gone too well.
But he was pleased with the choice of Wednesday for Volvo’s euro deal. “We moved our go/no go call 15 minutes earlier to be the first out,” he said. “It just felt like a good day.” The indicators to look at, very early in the morning, were “futures, rates, news,” he said. “Once you have done this for a while, you can get a hunch whether it’s a good day or bad day.”
Nevertheless, many apparently placid and supportive days have gone to waste in the past month, to the frustration of syndicate bankers.
“I’m sure borrowers have been deterred by the recent conditions — they have been shown levels of new issue premium that would put them off,” Kerr said.
This week, issuers were lucky. All six got their deals done well and had finished setting the final terms before the afternoon sell-off began. Most of them even got the desired tight new issue premiums, which have been rare in the past month.
Unilever and Volvo were estimated to have paid about 5bp of NIP, Orange only 2bp on its €500m no-grow 10 year sustainability bond.
“We always work with a cautious approach,” said Matthieu Bouchery, head of group finance and treasury at Orange in Paris. “We have enough liquidity, so we don’t have to issue a bond in a particular window, so we can mainly come to the market opportunistically.”
This is not just about short-range planning — picking the right day in a week — but long range.
The French telecoms group, which manages its debt on a fixed rate basis, has funded early, expecting interest rates to rise. “We issued €1bn in December at very good conditions and wanted to come back this year with a sustainability bond,” Bouchery said. “It was our expectation that even if market conditions are really worse than in December, they could be even worse later this year. We wanted to wait for a good window to make an issue, and didn’t feel waiting more would give us more favourable conditions. There is little favourable macroeconomic news, meaning the environment could be really difficult in the coming weeks or months.”
When so many issuers have to try to use the same days to raise bonds at once, there is a real risk of overcrowding. The pattern of the market recovering from a bout of risk aversion and swinging to enthusiastic investor appetite has recurred several times this year.
Often, when the market gets very busy, one or two deals on a day will be cold-shouldered by investors, all clamouring for the favoured transactions — those from the rarest names, with the best ratings, or offering an irresistible spread.
The sharpest case was Energie Baden-Württemberg on March 8, an exceptionally busy day in the market’s first upswing after the Russian invasion of Ukraine. Though it is a solid, well known issuer, EnBW had to pull its seven and 12 year transaction.
This week, that did not happen — all the deals went well. It helped that most were small, with no tranche bigger than €850m and only Unilever’s and Coloplast’s deals exceeding €500m. The shortage of issuance over the past months is another reason.
The one consolation bankers can see in the current market is that, despite the volatility, investors have plenty of cash to invest in investment grade corporate bonds and are not reallocating away from the asset class. “You have to ask where else they are going to put it, unless it’s cash?” said Kerr. “And cash rates are still unattractive.”
Investors seem to have developed a habit of wilfully forgetting their worries on occasional days, to enable them to buy some bonds, which they need to fill their portfolios. But they soon remember the ugly nature of this year’s markets. This week, the rude awakening came unusually quickly.
“The pipeline is building the whole time; we just can’t get enough deals done,” said the head of syndicate. On the right days, investors feel spreads are wide enough to entice them. But he added: “After yesterday, people will think twice about it.”