Free content

Europe’s leveraged finance market has survived another year without a downturn — indeed, spirits are remarkably buoyant going into 2019. The market is priced for perfection, however, and with rates starting to rise, issuers and investors have some serious forward planning to do. Victor Jimenez reports.

After back to back record years for non-UK sterling SSA supply, the 2019 outlook is obscured by thick Brexit fog. Nevertheless, public sector borrowers have a host of non-core currency options to tap as currency diversification becomes increasingly important.

SSA euro issuance outstripped dollars this year, thanks to strong conditions in the first half and the vagaries of the basis swap. But the end of eurozone quantitative easing and political strife made it a trickier place later in 2018 — and those elements are unlikely to disappear in 2019.

Public sector agencies from the Nordic region are adapting to S&P Global Ratings’ overhaul of its rating methodology. So far, only KommuneKredit has been downgraded under the new rating criteria, but others could suffer similar fates.

Public sector borrowers are confident going into the euro bond market next year, with reinvestments from maturing bonds held by the European Central Bank likely to cap any spread widening from the end of quantitative easing. But political threats — from populists polling well ahead of European Parliament elections in May, Brexit probably in March and the Italian government’s stand-off with the European Commission over its budget plans — are likely to bring volatility, meaning timing will perhaps be more important than in 2018. GlobalCapital brought together European SSAs, investors and investment bankers to discuss what 2019 holds for the euro market — as well as the SRI sector and new technology.

The dollar SSA market at the end of 2018 was in stark contrast to euros, despite the latter outstripping it in volume over the year. Even uncertainty over the Federal Reserve’s rate path in 2019 seems unlikely to shake the fortitude of the currency as a funding source for SSAs. But finding windows could become trickier as the Fed pulls liquidity amid global trade wars and rising populism.

In the last year that sovereigns, supranationals and agencies could enjoy the effects of the European Central Bank’s quantitative easing programme — but still had to cope with the Fed pushing up rates — GlobalCapital’s SSA team used its editorial judgement, with inspiration from GC’s world-famous bond comments and patented BondMarker app, to pick what it felt were the top trades of the year. The team strove to find deals that were not just the biggest — it looked for trades that set pricing markers, were innovative and brave or that made an impression in other ways. GC presents the winners here. Congratulations to the issuers and banks involved.

Work to bring the new risk-free rates to the dollar and sterling bond markets began in earnest this year as several issuers brought notes linked to them. But 2019 could be where clarity emerges on which of the different structures will win out.

The bond market is well ahead of schedule in its adoption of potential Libor replacements, with several issuers having printed notes linked to the Secured Overnight Financing Rate (Sofr) in the dollar market, and to the Sterling Overnight Index Average (Sonia) in sterling. Borrowers are setting strong standards for other participants to take up, as well as adjusting structures to ensure the eventual market is optimal. That does not mean the job is finished, of course. GlobalCapital spoke to some of the pioneers in the Sonia and Sofr markets about their work so far — and the challenges ahead.

A revolution is occurring in the Schuldschein market. This sedate and sober instrument has shaken its fusty reputation and transformed into a bustling hotbed of technological progress. Seven digital platforms sprang up in 2018, each declaring a grand ambition to drive efficiency. But with platforms jockeying for position, under the eye of the German regulator, some question the rate of change and the authenticity of some agents of it.

Equity capital markets bankers are expecting to be busy in 2019 despite the volatility that has marred the last few months of 2018. Nevertheless, they are predicting IPO sellers to be far more cautious when the market re-opens in January.

The leveraged finance market has been the best business for capital markets banks this year — but rising debt levels, weakened investor protections and the rapidly growing volumes have brought regulatory attention. Some banks are pulling back from the most aggressive deals, but others are taking their place, and a burgeoning non-bank lending sector is keeping the market white hot regardless.