It has been a rocky three months for the Euro-MTN market. Outstandings in yen continue to plummet, corporate issuance remains sparse and there are still no real signs as to when Japanese investors will return in significant numbers. But the market has rallied. Total non-syndicated issuance is marginally up on the previous quarter and, while corporate issuance has fallen, outstandings from the financial sector have risen by more than 20% and many dealers report a very busy start to the year. "The obvious story from the first quarter has been the extreme investor caution and their reluctance to buy corporate names," says Gayle Turner, head of Euro-MTNs at Commerzbank. "But there is no cause for alarm. We are hearing murmurs that things will improve. And, on the issuance side, corporates have clearly not raised enough funds and will have to return to the market soon." The corporate sector is still reeling after the record number of corporate defaults in 2001. According to Standard & Poor's, 216 companies defaulted last year on $116 billion-worth of debt and this has hampered the sector's non-syndicated issuance. Corporates have closed almost $30 billion-worth this year, but with Japanese investors still apprehensive about buying corporate names, this figure is down by 15% on the previous three months. "The Japanese investor base has been a part of the market that hasn't really existed this year," says Evie Christodoulidou, assistant director, Euro-MTNs at HSBC. "Japanese yen has not been there for us and consequently corporates have not been there either." But the bank is not too worried by the poor performance in yen. Increased issuance in Hong Kong dollar has been a major feature of the market this year and HSBC has been lead-manager on 60% of these deals. Nearly $7.5 billion has been closed in the currency since the start of 2002 and Fergus Kiely, head of Euro-MTNs at HSBC, anticipates more to come. He says: "The big event for us has been the increased demand for Hong Kong dollar. On January 3 we printed four tickets in the currency and from then we knew that Hong Kong dollar was going to be the flavour of the market. It has been a great first quarter in terms of volume and we are looking forward to the rest of the year." But ideally Kiely would like to complement this success with increased issuance in yen. "Everyone is waiting for the Japanese investors to come back," he says. "They have a lot of cash to invest and they will need to put that to work eventually. Interest will pick up now with the new fiscal year but when Japanese investors will make a significant return is the million-dollar question. What we do know is that things cannot get any worse than they are." Simon Hill, head of Euro-MTNs at CSFB, agrees. He says: "The yen market for vanilla trades has fallen apart. There has been a little bit of demand from investors recently but that has been exclusively for Japanese issuers. We will see a comeback in this market but it is a comeback from almost nothing." Despite this, financial and double-A issuers have found success in the first three months. Issuance from financials is up by 20% on the previous quarter to $76 billion and outstandings from double-A borrowers are higher than any other rating band. Turner, at Commerzbank, is not surprised by these figures. She believes that the troubles with Enron have forced people to look at different options. "The appetite for quality has filled the void left by falling corporate issuance. Those issuers that were previously seen as too expensive in the past are now doing well. Investors are currently happy to pay a little bit more to avoid expensive mistakes such as Enron," she says. But while Enronitis has caused extreme volatility in the markets it is starting to have a positive effect on Euro-MTN issuance this quarter. Company balance sheets have come under intense scrutiny and, as issuers do all they can to protect themselves from further shocks, they have begun to move away from short-term funding in the CP market to longer-dated trades in the MTN market. Michael Bransford, Euro-MTNs, global credit derivatives at Deutsche Bank, explains why issuers are going for longer maturities. He says: "Issuers have been cleaning up their balance sheets after the Enron affair in an effort to make their debt profiles more attractive to investors and shareholders. There has been some well-publicized criticism of issuers' over-reliance on the Euro-CP market. In response, many issuers have begun to term-out debt, which has benefited the Euro-MTN market." And this is backed up by data from Dealogic's MTNWare. Issuance of trades that reach out more than nine years has increased by 50% on the previous quarter and volumes from trades with a term of up to three years has risen from $74.67 billion last quarter to $88.35 billion. And, according to one dealer, issuers such as AIG and General Electric, which have been reliant on the Euro-CP market, are starting to hit the Euro-MTN market with some long-dated trades. Aside from Hong Kong dollar, issuance in Czech koruna, sterling and euro have all picked up on the previous quarter. But dollar has seen the most activity over the past three months. Just under $65 billion-worth has been closed in US dollar this year, but this does not come as a shock to most dealers. "There have not been any real surprises in the market," says Hill, at CSFB. "Everything that was predicted before the start of the year has rung true: i.e. that there would be more dollar-denominated structures and fewer equity-type tickets." Kiely, at HSBC, agrees: "There has been a lot of demand for US dollar-denominated structured deals out of Asia. US dollar callables have been a big hit. Because of falling corporate issuance and the higher yields that go with the paper there has been a big focus on structured trades." But the main news of the year continues to be the absence of corporate borrowers and Turner, at Commerzbank, sums up the feeling of most of the dealing community. She says: "In general it has been an excellent year in terms of volume and trade turnover. The market is strong but I hope that we will do more for corporates in the months to come. We are conscious of pushing our sales people to focus on corporate names and I think as long as issuers remain flexible, it will be a strong year for MTNs."
April 05, 2002
