Corporate credit's Goldilocks status is there to exploit
Cyclical companies facing stormy horizons have a rare opportunity to smooth out their funding early next year
Europe’s high grade corporate bond market is going to be a Goldilocks fixed income asset class at the start of next year. Clever companies in bearish sectors will feast quickly.
Investment grade bonds are in a sweet spot. With spreads in the belly of the curve often in the 100bp-200bp range, there is plenty of leeway if rates have a wobbly week, while the chance of a high grade corporate going bust without first descending over months into junk ratings is so low as to be negligible.
This is great news for corporate issuers and the €215bn-€255bn of debt they are expected to refinance next year.
Add to that refinancing amount the modest €50bn-€100bn of net new issuance predicted for 2024, and Europe’s investment grade companies should be able to get funding away at better relative terms than other major fixed income asset classes because demand will outstrip supply as money moves to the safety of corporate credit.
But not all corporates are made the same. While elite blue chips will have the run of almost any market, regardless of conditions, companies from more difficult sectors should move quickly if they are to achieve the best results.
Cyclical companies are tipped to take a hammering this year as far as their bond yields, spreads and their earnings are concerned as the bite of recession stymies discretionary spending. There is a school of thought that these companies should hold fire on debt market activities and wait for rates to drop. The US Federal Reserve sent markets rallying this week when it hinted at a 75bp cut over the course of next year.
But that is risky thinking. Refinancing is not an optional activity. Unlike capex or investment, it has a hard deadline. The corporate bond market is on fire now and will remain so in January. Investors will be flush with start of year cash, and spreads will be starting the year at or close to the tightest levels since the start of 2022.
More difficult names should rush the market and make out like bandits before the rest of the debt world catches up, and high grade corporate bonds no longer feel such a safe place to be.