Summer deals are too risky for most corporate borrowers
Almost all corporate funding officials are right to wait until the final week of summer before bringing trades
Volvo may have drawn blowout demand for a five year deal on Thursday — backing up many bankers’ claims earlier this week that too many companies were missing a golden opportunity to print fresh bonds — but the balance of risk suggests that corporate treasurers should wait until very late August or even September to get their deals done.
Volvo’s €500m trade lured €3.2bn of orders and appeared to have been priced flat to fair value. A decent result at the best of times, let alone in the second week of August in a period of rising interest rates, super low liquidity and generationally high inflation.
The deal came a few days after one corporate bond banker called issuers “idiots” for not bringing deals during the dead of summer, with treasurers instead being overwhelmingly happy to wait until the traditional issuance period at the beginning of autumn.
He wasn’t alone in his thinking, with many others sharing their dismay at the lack of new issues in, what Volvo’s deal suggests, was a wide open market.
But capital markets are, at their heart, about people and individual choices. Behind every faceless, monolithic corporate issuer is a treasury team made up of individuals. And their hopes and fears play far more important roles in how funding programmes are managed than many in the market would like to admit.
To bring a deal, a treasury official would likely need their chief financial officer to sign it off. Few would want to present such an idea to their boss in a market like this at this point of the year. The potential for personal catastrophe is high and the upside for them is, at best, simply that some more funding got done.
If that same treasurer urged the company to hold back from bringing a deal until September — pointing to the many strong arguments suggesting the risk of failure right now is high, such as high volatility and low liquidity in the market — their job might well be more secure.
They’ll have done all the right conservative and conventional things — after all, who wants a maverick in charge of the purse strings with so much at stake?
The outcome of a deal is always, to a degree, unpredictable. An issuer can only control the decision to go ahead, not the outcome.
Therefore, even if a deal is crowded out on, say, a busy day in September, and ends up priced well wide of fair value, the treasurer can stand in front of the CFO and point to the number of deals on screen and say they just got unlucky. But the decision to go ahead was sound — as shown by the number of other issuers that did the same thing.
The bare facts are that an investment bank does not get paid for not doing deals and regardless of how well they go, bond mandates are, for the most part, all upside. But a corporate treasurer who starts printing duffers will find nothing but personal downside.