Total volumes are holding steady in the Euro-MTN market but one sector is struggling to match the outstandings of last year - corporates. Their issuance has plunged and volumes are down by nearly 30% on the same period last year. The headline corporate defaults of 2002 have alarmed Japanese investors, and while they continue to stay away from corporate names, issuance from the sector will struggle. "Basically Japan is closed to corporate issuers. The yen market has shut its doors after the trouble with Enron and now has little interest in corporate credits," says Fergus Kiely, head of Euro-MTNs, at HSBC. "Hopefully interest will pick up into the new Japanese fiscal year but exactly when Japanese investors will actually return is the million-dollar question." Michael Bransford, MTN trading, global credit derivatives, at Deutsche Bank, agrees. He says: "We have certainly noticed a decline in corporate issuance. And one of the major reasons has been the reduced demand from the Japanese investment trust managers (ITMs). The headline blowouts of Enron, Tyco and Kmart and the general volatility in the market have spooked investors. The Japanese ITMs were huge buyers of short-dated corporate paper last year but have been net sellers this year-to-date." But there is hope for corporate borrowers. Just over $28 billion has been closed in the corporate sector this year despite only $1.44 billion being denominated in yen. And Bransford, at Deutsche Bank, believes that if issuers are prepared to be flexible then there are still opportunities to be had. "Despite the challenging backdrop the market remains open for corporates," says Bransford. "There are pockets of demand in Europe, as well as in the Asian block. We have had particular success in the Hong Kong and Singapore markets for single-A corporates. There are additional opportunities for issuers willing to consider structures in both EMTN and schuldscheine format. I would encourage corporate issuers to be aware of their secondary levels and remain open to various currencies, structures and smaller vanilla trades." This has worked for Heidelberger Zement. The triple-B German materials company had not tapped the market since June 2001 but last week the issuer closed its first euro trade since October 2000. Christian Kammann is group treasurer at the company and he believes that being open to ideas was instrumental to placing the note. He says: "Our euro17 million ($14.78 million) six-month note via ABN Amro is the first thing we have done for quite a long time. We are also currently looking at a highly structured euro proposal. The small private placements that we were used to issuing have fallen away so being open to this type of structured deal is obviously something we can do to help ourselves get the levels we want." Kammann has also noticed a sharp fall in Japanese interest this year. The number of corporate yen trades issued so far this year is almost half of what it was in the same period last year and volumes in yen have fallen from $2.13 billion to $1.14 billion. Kammann says: "Since 2000, when we did our first yen issue, we have maintained a presence in Japan. But we are seeing very limited demand out there. We are finding it much more difficult and have had just one offer from yen investors for ¥1 billion ($7.48 million), which is markedly lower than what we saw early last year." But the worst may be behind the corporate names. Kammann has noticed that the market has become a little livelier and is now able to issue at the levels he wants. And Kiely, at HSBC, believes that the high calibre of corporate issuers signing Euro-MTN facilities should allay investors' fears. Kiely says: "Generally speaking those corporate issuers that have set up MTN programmes have met certain criteria and are what I consider to be sensible. They are well known names and I do not think they pose a risk to investors. Investors are also more aware of hedging options through the credit default market."
February 22, 2002
