When the going gets tough: end of easy money for SSAs laid bare
Public sector borrowers have faced a changed market in 2022. As rates — and market volatility — have risen and central bank support has retreated, this elite group of borrowers has had to face up to the reality that there are no longer any easy deals, as analysis of proprietary data reveals. By Ralph Sinclair.
The first and clearest sign that sovereign, supranational and agency bond issuers would no longer have it their own way after years of near flawless execution of their syndicated benchmark trades came in June, when two borrowers had to pull their deals in the same week — France’s Sagess and Canada’s Caisse de dépôt et placement du Québec.
That was something a number of SSA market veterans could not remember having happened ever before. But it was a sign that the combined forces of rising interest rates, market volatility — as investors struggled to grasp the level of inflation gripping economies — and the withdrawal of central bank bond buying were taking their toll on what had been glorious primary market conditions for borrowers.
Now, data gathered for GlobalCapital’s Primary Market Monitor, which tracks certain execution metrics of syndicated benchmark issuance in the major currencies, demonstrates just how much tougher SSA borrowers have it for their most important bits of fundraising.
Demand, as measured by the subscription ratio for syndicated deals, has slipped since the beginning of 2022 — and indeed since the beginning of 2021. Meanwhile, the average new issue premium has risen, suggesting that the extra spread is not attracting extra orders.
That seems grim enough — but add to that falling issuance volumes and a lower number of deals and one might typically expect the balance of power to have swung in the favour of issuers and yet it has not. In 2021, Primary Market Monitor recorded 422 syndicated benchmark deals from SSA issuers, raising just over $1tr-equivalent of funding. The average deal size was just shy of $2.4bn-equivalent. In 2022, up until mid-November, there had been 362 such deals, raising just over $670bn-equivalent, or an average of a shade under $1.9bn per deal.
Meanwhile, the amount of demand per deal has fallen across the board. Agencies attracted, on average, orders of 2.8 times the deal size in the first quarter of 2021. That slipped to 2.5 times in Q1 of 2022 and has amounted to only 1.7 times so far in Q4. Supranational issuers attracted, on average, orders of 5.2 times the deal size for their public benchmarks in Q1 2021, a figure which fell to 4.1 times around the turn of the year and which has languished at 2.8 times so far in Q4 of 2022. But the biggest drop has been in demand for sovereign syndicated issuance. The average sovereign syndicated benchmark was eight times oversubscribed in Q1 2021 but has been just 1.4 times subscribed in Q4 of 2022 so far.
No push on pricing
There has been greater caution over pricing too. A trend for issuers of recent weeks has been granting investors certainty of pricing by not attempting to squeeze the spread during execution. In Q4 of 2022 so far, agencies, supranationals and sovereigns were able to tighten pricing on their syndicated benchmarks on average by 1.3bp, 0bp and 1.2bp respectively.
They have made that choice — or perhaps have had it forced upon them — to placate investors wanting greater protection for committing cash to deals as interest rates rise so fast.
By comparison in the easier, central bank-supported markets of 2021, those same three types of issuer were able to tighten pricing by 2.1bp, 8.2bp and 3bp, respectively, according to Primary Market Monitor data.
Issuers have been paying up too. The Primary Market Monitor measures new issue premiums paid on syndicated benchmarks by taking an average of what market participants on and off the deal calculate it to be.
The measure is, of course, subjective but taken for the market overall gives a guide as to what issuers are having to pay over and above fair value to sell new benchmark bonds.
Supranationals paid, on average, 0.8bp of new issue premium for a syndicated benchmark in 2021. That has risen to 2.7bp for 2022 to date and has been 3.5bp and 3.6bp for the last two quarters respectively. Canadian issuers paid on average 1.1bp of concession in 2021 but have had to cough up 3.4bp so far in 2022.
French issuers have paid 5.7bp of premium per benchmark in 2022, compared with 1.6bp in 2021.
Another theme of 2022 has been patchier access to dollar funding, as the US Federal Reserve took the lead among the world’s central banks in pushing up interest rates to fight inflation.
A look at two of the biggest supranational and agency borrowers — the European Investment Bank and KfW, which typically issue benchmarks in both currencies a number of times a year — reveals a heavier reliance on their home market, the European single currency.
The EIB has raised slightly less of its benchmark funding in euros so far in 2022 compared with 2021, having printed $20.6bn-equivalent compared with $21.8bn-equivalent. But in dollars, it has issued just $15bn of benchmark funding in 2022 versus $19bn in 2021. That has shifted the euro portion of its benchmark funding mix from 53% up to 58%.
The shift is more pronounced in KfW’s case. It has issued roughly $50bn-equivalent of its benchmark bonds in euros so far in 2022. That compares with $38.2bn in 2021. Meanwhile, in dollars it has syndicated $16bn of bonds so far in 2022 versus $25.5bn in 2021 — a drop of 37%. That has rebalanced its benchmark issuance from 60:40 in favour of euros to 76:24, according to PMM data.
Meanwhile, as interest rates have risen, investors have sought shorter dated bonds, the prices of which fall less than longer dated paper for a given rise in rates. This has shortened the average maturity of an EIB benchmark in euros from 15 years last year to 8.6 in 2022.
So far in 2022, the EIB has issued benchmarks in euros of, on average, 8.6 years’ maturity on a deal-by-deal basis. That compares with an average maturity of 15 years on its benchmark issuance in 2021. In dollars those figures are five years so far in 2022 versus six years in 2021.
For supranational and agency issuers overall, it is a similar tale. In euros, the average maturity of a benchmark deal in euros has been 10.9 years so far in 2022, compared with 13.3 years in 2021, according to PMM data.
In the dollar market, however, the average maturity for a syndicated benchmark so far in 2022 has been 6.2 years, compared with 4.8 years in 2021. GC