High hopes for corporate issuance in 2023
This year was a tough one for European investment grade corporate borrowers in the bond market, but there is plenty of optimism that 2023 will be easier. Mike Turner surveyed senior corporate bond bankers across Europe to get their thoughts.
There were €299bn of deals done by investment grade corporates in 2022 to November 11, according to Dealogic data, a far cry from the €469bn of trades printed a year earlier.
The biggest fall came from the real estate sector. After a period of heavy issuance in the first quarter, property companies largely shied away from the market for the rest of the year after seeing spreads balloon on the back of fears that people would not return to shared spaces in the same numbers as before the pandemic.
The real estate sector saw the biggest spread widening of all sectors by some margin this year, rising 199bp from 122bp on January 1 to 321bp by the end of October, according to fixed income analytics company Overbond. The next largest spread widening by sector came from utilities, which as a sector widened by 90bp less than real estate.
The problems facing companies, and their banking advisors, in coming to the market in 2022 were myriad, but common to many was soaring inflation which forced central banks to jack up interest rates, hastily scale back quantitative easing programmes and in some cases, such as the UK, switch to outright quantitative tightening.
Some, such as utilities and energy companies, were caught up in the cost of living crises across much of Europe as governments responded to soaring energy prices through a variety of ways including vast subsidy programmes, price caps and privatisations.
Spreads widened, new issue concessions leapt and, crucially, issuance windows became much more defined and shorter.
However, a survey of senior syndicate and debt capital market bankers in Europe by GlobalCapital has found that optimism is running high for the year ahead.
“We are poised for a decent pick-up in volumes in the first quarter of 2023,” says Giulio Baratta, head of debt capital markets corporates, EMEA, at BNP Paribas. “Issuers will be taking advantage of liability management, financed by new issuance.”
Baratta is not alone in this belief, with 100% of those surveyed agreeing that the next year will be at least 20% busier than 2022. This is the only question that the bankers were uniform on in their agreement.
“We do not expect the weak late-2022 pace of supply to persist into 2023 for two reasons,” says Yuri Seliger, a credit strategist at Bank of America. “First, the unfavourable market conditions likely delayed issuance and pushed it instead into 2023. Second, we look for better demand in 2023 as we get more clarity on the Fed and more stable yields.”
Markets on both sides of the Atlantic were lifted into a buoyant mood in mid-November when the US consumer price index print came in softer than expected for October at 7.7%, down from 8.2% a month earlier. This suggested that inflation in the US has peaked and the US Federal Reserve can be less aggressive in its rate rises.
However, Europe is much more reliant on Russia for energy, meaning there is little if no correlation between US and eurozone inflation.
Nonetheless, plenty in the market hope that it will become easier to judge what central banks are going to do, which will make it easier for corporate borrowers to be more ambitious in approaching the primary market.
“A more fixed income-friendly phase at the beginning of the year, which is a clean sheet for investors, means there may be some rebalancing of pricing power,” says Baratta at BNPP. “This means you might see slightly tighter concessions. But we are gaining much better visibility on execution risk, on what is doable and how, which maturity gets the size you want. Then you can optimise pricing.”
Of the bankers surveyed, 28% thought that new issue concessions might rise by up to 10% on average in 2023, while 56% thought they would stay roughly the same as where they are coming into the end of the year.
The remaining voters, a small minority, reckon concessions might start falling back to the 0bp-5bp range seen at the beginning of 2022.
New issue concessions have varied sharply in recent months. Highly rated, non-cyclical frequent borrowers could expect to pay single digits, with Nestlé and Volkswagen issuing trades in November that paid just a handful of basis points over their curves.
Further down the credit curve or into more energy-intensive cyclical sectors, however, and issuers can expect to pay far chunkier premiums.
Metals company ArcelorMittal was probably the clearest example of that in 2022, with the issuer paying a new issue concession of 70bp-110bp — depending on if you asked someone on or off the trade — for a €600m four year deal in September.
It remains bad news for out-of-favour sectors, with the majority of those polled expecting the spread difference between cyclical and non cyclical issuers to continue rising by a large amount. In total, 78% of those polled said that the spread difference will be at least 20% higher than it was at the beginning of 2022, and will continue rising from the 100bp-120bp range where it is now.
The rest of those who voted were only a little more positive, expecting the spread to still move around 10% wider.
The benefits of going green became more opaque in 2022, with a clearcut spread benefit for issuing green debt, known as the greenium, largely vanishing. One banker put it at 3bp, another said it was a high as 5bp but added that getting to this number was “not scientific”.
However, the structure still bought with it a notable benefit — opening up a deal to more investors at a time when volatility meant getting a deal done at all was not always guaranteed. The extra investor base adds to the demand, but there is not quite enough to put significant downward pressure on pricing, according to multiple bankers.
Furthermore, multiple bankers and issuers have said in recent weeks that it is only use of proceeds environmental, social and governance bonds that get this added benefit because they fit into green investors’ portfolios. This means sustainability-linked bonds will not see more demand for having an ESG label.
A 61% majority of voters said they thought the greenium would remain the same in 2023, that is, low single digits, with the remaining voters reckoning it would shrink to zero.
Find a niche
Niche markets became attractive to many borrowers in 2022, a trend expected to continue throughout 2023.
The Schuldschein market is on course for a record €31bn year in 2022, in part because of high grade corporates making debut forays in this market having seen conditions in the public markets worsen over the year.
US private placements have also proven popular, with bankers anecdotally saying that the private market has seen high levels of dealflow.
This growth is likely to continue into 2023, according to Europe’s corporate debt bankers. An optimistic 17% think that the private debt and Schuldschein markets could grow by more than 20% over the next year, while a more moderate 50% reckon it will be closer to 10%.
Meanwhile, 33% think that the niche debt markets in 2023 will be roughly the same size as they were in 2022.
It is notable that no bankers think the niche debt markets will shrink in the next year, so Schuldschein participants can likely look forward to another record year at least.
However, there are a significant number of moving parts going into 2023, with the global economy still vulnerable to soaring inflation and recession.
Ultimately, what it will take is pragmatism, according to Baratta at BNPP, that is “based on how certain countries will enter into recession, how potentially deep or prolonged this correction could be, assessing how aggressive central banks will remain with tightening, how fast they are going to stabilise or return to dovish. This is going to dictate the consequential assessment around funding markets”. GC