Take heed before cancelling summer
Capital markets is a human relationships business. The people that forge these ties need time to recharge and rebuild, or they risk mistakes after a turbo-charged half year
Capital markets fundraising is built on relationships. Like in any relationship, people are front and centre: from issuers and investors to the bankers, lawyers and other intermediaries that make it happen. And the people of the debt capital markets are in a dire need of a break after an intense first half of 2023.
That could just be for market participants to have the time to digest the developments of the past six odd months and put things in a perspective.
The market context is wide ranging. There were bank failures on either side of the Atlantic, engulfed by fears of a contagion in the financial industry from flights of deposits. The latest round of bank earnings provide some answers but not full clarity.
And amid all that, there was high volumes of bond issuance across Europe.
Financial institutions issued more than €208bn of unsecured public bonds in euros up to July 18, data from GlobalCapital’s Primary Market Monitor show. This is an astonishing 60% higher volume than what was printed in the single currency during the same time last year.
That’s no mean feat, considering there was another record year-to-date issuance of almost €150bn of covered bonds so far in 2023.
The rescue of Credit Suisse — the first globally systemically important bank failure since the financial crisis — dampened subordinated FIG issuance for months. But the covered bond market remained operational, even after the record annual volume of almost €200bn in 2022. And analysts forecast around €40bn-€50bn more for the rest of this year.
Take that holiday
Major central banks, with the exception of the Bank of Japan, are retreating from the primary and secondary bond markets as they attempt to fight the stubbornly high inflation through quantitative tightening. That has exerted pressure on new issuance and accelerated many corporate and FIG borrowers’ funding plans.
This was evident this week — after France celebrated its national day on July 14. So-called Bastille Day typically tends to signify the beginning of the summer holidays for much of the European debt capital markets.
In the past, the passing of the French public holiday used to signify a summer lull for bond issuance. Only sporadic odd trades would make their way into the market before the issuance resumed in earnest from the latter part of August.
But in the two days of this week, meeting market expectations reported by GlobalCapital, the €4.35bn of bank issuance is anything but sporadic.
This was most obvious in the most strained and fatigued part of the European FIG corner — the covered bond market — where Société Générale printed a jumbo €2.5bn dual tranche deal on Monday.
A day after the rare deal from a French issuer after Bastille Day, Royal Bank of Canada found the market conducive to bring its first covered bond in the single currency this year to lift €1.5bn from a five year outing.
Arguably, Bastille Day should not prohibit market participants from doing their business. Especially in a turbulent year like 2023, when players are still staffing desks before major central bank meetings later in July.
Market conditions are close to the best they have been this year, surely enticing borrowers looking to advance their funding. These may be compelling reasons to issue for lower tier banks that will only face the competing gauntlets of the national champions come September. Hence, it was not surprising that Bank of Cyprus opted to print what became its largest outstanding bond on Tuesday.
But the Ba3/BB-/B+ rated Cypriot lender is an infrequent issuer with only one other senior bond out there. It is the major issuers that can ramp up strain on one of the most valuable part of capital markets — relationships.
Banks often say they don’t need funding to open books on intra-day basis, or that they are done for the year to soon announce pre-funding for the next.
The lack of central bank buying may be amplifying such thinking, but this is not helpful for investors and, arguably, more so for other issuers. This creates a sense of each issuers trying to one-up each other, in vicious loop that risks cutting shorter the summer break.
Last year's FIG issuance offers a peak of how borrowers have fast forwarded their funding. Some €21.5bn of unsecured debt was printed between August 16 and 31, PMM data shows, which was almost €1bn more than for all of September.
A balance needs to be struck, even if that’s outside of the seemingly deceiving bond market context.
A holiday may or may not solve macro puzzles that market participants are facing later in the year. But it will refresh them to better tackle what no doubt is shaping up into a busy autumn.
Additionally, issuers and investors must take stock of what worked and what did not, and — more importantly — why. Aside from washing away the bad taste of difficult deals, a break can also help with secondary spread tightening.
After all, there is ample talk of how artificial intelligence will transform the finance industry and with it, the capital markets. Whether that happens or not aside, capital market participants are only humans. And the humans that forge the relationships should strive for a break, if only to use these relationships to come back stronger when markets roar back in September.