Bank on today, not tomorrow
The uncertainty fueled by the events of 2016 has left the markets shaken with many issuers reticent about launching new deals before the end of the year. But borrowers keen to put the year behind them should think twice about betting on 2017. With impending elections in Europe and Donald Trump’s inauguration, there is plenty that could cause markets to unravel in the first quarter.
The shock events that roiled markets this year have been well documented from the their near shutdown in the first few months to the surprise Brexit vote in June and most recently Trump’s victory in the US. As the year draws to a close, issuers may be keen to put 2016 behind them and start afresh in the New Year, but borrowers should think twice before dismissing the idea of selling a bond in December.
One of the few events on investors’ radars is the upcoming Federal Reserve meeting in two weeks. But that should be the least of issuers’ fears as the market has already priced in and accepted that a rate rise is coming, despite Trump-related uncertainty.
By contrast, next year is full of potential stumbling blocks. Chief among those is political risk. For example, in the next 12 months 75% of the euro area is heading to the polls, starting with Italy on Monday. In nearby France, far-right leader Marine Le Pen looks more and more like a realistic victor. Should she win, she’s promised a referendum on France’s place in the EU. If either of those countries chooses to leave the Eurozone, the ramifications would be immense.
And when Trump takes office in late January, he’ll begin his first 100 day push to prove voters that he was worth supporting. How that will translate into policy is anyone’s guess. But the populist movement that pushed its way through Britain and the US in the last year has shown that many voters begrudge globalisation and may push their new governments toward isolationist policies.
Of course issuing in December is not the easiest option, as investors are happy to replace lengthy meetings with long lunches. Issuers may be tempted to wait until January when the market will again be flush with money. But investors are still looking to buy this year. The flurry of bond sales in September and October did not fully compensate for the relatively quiet start of the year. And since the US election, the Asian debt market has been fitful, leaving gaps in investor portfolios.
Moreover, the window between the January 1 and Chinese New Year is only four weeks, putting even more pressure on those credits that do decide to come out. And that’s assuming there’s not a repeat of 2016 where the bond market was largely shut until April.
Hitting the market now won’t necessarily be cheap. Issuers will need to pay some new issue premium to compensate investors for the risk taken. As investors wrap up the year, they also won’t have a huge amount of funds to allocate, so smaller size transactions will be easier to price.
This year’s uncertainty may have tested even the most confident of issuers, but there’s no guarantee that next year will be any better. Issuers would do well to act now while sentiment is generally positive. After all, better the devil you know.