Worst markets for years keep treasurers on their toes
Nimbleness was the name of the game for Europe’s high grade corporate bond issuers in 2022, as war, inflation and the end of quantitative easing transformed the market. High inflation means a large chunk of 2023 will be the same, but corporate funding chiefs hope the latter part of next year could provide excellent opportunities for issuance. Mike Turner reports.
Corporate bond issuers were clobbered from all sides in 2022. Rocketing inflation made central banks flip quantitative easing into reverse. Energy costs soared on Russia’s invasion of Ukraine and the threat of a continent-wide recession gnawed at markets from the summer on.
Investors had a tough time as well. By early November, the S&P Eurozone Investment Grade Corporate Bond Index had returned minus 12.5%. A far cry from the almost guaranteed positive returns during years of central bank bond buying.
“The main challenge was the heavy news flow,” says Bernard Descreux, director of financing in group treasury at Electricité de France in Paris. “Very often we were restricted to issue because we had some information to provide to the market. The windows were narrow. At the same time, we had to cope with market news flow, which was a heavy one.”
All this added up to one thing, he says: “It was not easy to find a window for issuance.”
Wait it out
EDF is not typical — but it is emblematic of 2022’s angst. France’s largest electricity generator and supplier was caught in the jaws of the year’s raging energy markets.
Having sold its power forward, EDF was bombarded with demands for cash margin payments as electricity prices soared — even though the underlying price movement is bullish for EDF. That and the French government’s decision to cap retail power prices meant that the state decided in July to buy out the remaining 14% of EDF it did not already own.
EDF had to wait until early October before it could issue its first bond of the year — a €3bn green trade in three tranches.
“We had to be very nimble — there was no window before then, and the door closed just after this one,” says Descreux. “It’s very difficult, so you have to wait until you see all the green lights. It’s quite stressful — you have to wait and wait, and try to be as discreet as possible in order to not be seen by all market participants before you go.”
Although EDF’s woes were its own, every European issuer was affected by the market turbulence caused by surging energy prices — the main driver of inflation.
Energy companies of all kinds have been at the eye of the storm. Germany plans to raise €10bn from a windfall tax on energy companies, while Spain plans a tax on utilities, as well as a 4.8% windfall tax on banks’ income. The UK is also increasing windfall taxes on energy companies.
In Germany, the government bought a 98.5% stake in Uniper for €8.5bn. Uniper was the country’s biggest gas importer and had suffered acutely from the disruption to Russian supplies.
At the other end of the energy scale are power grids, which keep on humming and collecting regulated tariffs, whatever the power price or state of the economy. But even they have had to tread carefully.
“This year it was much more sensitive to look for the right window, with less available windows to tap,” says Gerard Kits, head of treasury at Tennet, the Dutch grid company, in Arnhem. “We therefore prepared deals a bit earlier, took a bit more time to find the right window to execute.”
It was not all about caution — there was room for daring, too. Tennet essentially re-opened the long end of the euro bond market in October, when it printed a €3bn four tranche green bond, including an €850m 20 year.
Before that only Deutsche Bahn, owned by the German government, had dared issue a corporate 20 year bond since the European Central Bank stopped expanding its corporate bond portfolio in the summer.
A technique that has helped issuers weather volatile periods is green issuance. While many borrowers and bankers say the spread benefit for green issuers has dissipated, opening up a deal to investors that can only buy green debt offered something else this year — a better chance of getting a deal done at all.
“In these volatile times, it is helpful to have a green bond in the market because that results in more investor interest,” says Kits. Tennet is one of Europe’s biggest green bond issuers. “If you have more investor interest that also has a positive effect on price and/or size.
“The ESG bond market seems to grow and becomes increasingly important to investors and the ECB is looking more and more to ESG transactions.”
Multiple bankers say this benefit was attached to green bonds, not sustainability-linked bonds, as there was no defined group of investors that would only buy SLBs, in contrast with use of proceeds green debt.
However, SLBs still proved a ripe product for issuance this year — borrowers are convinced the structure helps.
French beauty group L’Oréal broke with 103 years of tradition and made its first foray into the bond market, with an SLB as part of the array.
This was before central banks started turning off the taps and volatility rocketed. Enel, the Italian electricity and gas company, issued €1bn and $4bn of sustainability-linked bonds in the autumn.
The deals demonstrated how “truly sustainable business models are sought after by the market,” says Alberto De Paoli, Enel’s chief financial officer in Rome. “Even in challenging times, like the ones we are currently experiencing.”
This was seen during the depths of the pandemic as well, when market participants argued that if a company was in a position to focus on its environmental, social and governance problems, it was strong enough to feel confident it would get through the present turbulence.
The dollar deal allowed Enel to “continue to diversify its investor base”, says De Paoli.
There is good news and bad for Europe’s high grade corporate issuers. With central banks raising rates at a speed not seen for decades, inflation is expected to peak and start falling again.
“Next year will be easier,” affirms Descreux at EDF. “Central banks are moving from behind the curve to the forefront. Probably by the end of the next half year, the market can be open to a bond rally, once we are sure inflation has peaked.”
Other funding officials agree with this point of view, though they have consigned at least the first part of 2023 to the same wild market swings that made this year so difficult for issuers.
“Next year, I expect still some volatility, but hopefully at a certain point of time there will be more stabilisation,” says Kits at Tennet. “At the moment market expectations and the forward curve indicate that rates will peak in 2023, after which we expect there to be a higher degree of certainty and stability in the market.”
There are already some signs of conditions improving. On November 10, the US annualised Consumer Price Index came in at 7.7% for October. This was down from 8.2% in September and was immediately taken as a sign that inflation might have peaked in the US and that the US Federal Reserve’s terminal rate might not go as high as the feared 5%.
Financial markets rallied immediately, with the S&P 500 up by 4.2% on the day, while the 10 year Bund yield fell 16bp to 2.01%.
New issue concessions were almost as volatile as the macroeconomic picture in 2022. Again, all issuers suffered, but some more than others.
ArcelorMittal, from the out-of-favour, energy-guzzling steel industry, paid a concession of more than 100bp on a bond in September, while super-defensive, well followed Nestlé was able to pay a zero premium in November, despite pricing flat to mid-swaps.
Towards the end of 2022, concessions settled at around 20bp-30bp for defensive issuers offering unambitious maturities and sizes, increasing to 40bp-60bp if a borrower wanted to go big or long. This is a sharp rise from the zero to 5bp that many expected to pay at the beginning of the year.
“From an issuer’s perspective, we have sympathy with the difficult investment decisions investors have to make,” says Kits. “We understand there is some concession needed to mitigate this new risk. But if the market stabilises a bit more in the new year, concessions will also go down again.”
Tennet appeared to have paid 25bp in premium on the shortest of its four tranches — a six year — in October, and 48bp on the 20 year.
Spread the net
Of course, corporate issuers are not obliged to issue public bonds. The Schuldschein was one of the few markets to have a shining year in 2022, and is on track for record issuance of over €30bn, beating the previous high of around €27bn.
The strength of that market, plus Europe’s fiercely competitive syndicated loan market and US private placements, gives treasury teams plenty of options. It can just be a case of knowing which one to take.
“All issuers know that markets are not always open, so they have to find alternative sources of liquidity,” says Descreux. “For EDF, we have a multi-track approach, not dual track. [We work on] several projects of financing at the same time, and we press the button at the right time for one of them to be launched.”
“Given the number of moving parts,” he adds, “we cannot predict which one will be triggered.”
Issuers have had to learn fancy footwork this year, and will likely have to keep practising their dinking and shimmying next year.
“Being more flexible is very important,” says Kits. “It’s not ideal, but in the end, we were able to get large deals done.” GC