The one thing which dealers will never grow tired of reading is what their competitors are up to - a character trait which seems to have been exacerbated by the economic trouble in Asia and the prospect of Emu. At the start of this year we asked various market experts for their predictions for 1998 and what the market had in store for them. The uncertainty surrounding the Euro-MTN market, coupled with public demand, dictates that we ask again: what does the remainder of 1998 have in store? Credit, credit and more credit. At the start of the year many dealers tipped this to be the area of focus and so far, they have been proved right. It may be a subject which, for many, is growing old but looking forward the credit-theme will certainly grow in importance. There is a definite increase in activity further down the credit curve and there's also been more attention to credit stories. Investors are becoming comfortable with lower rated credits and an investor which is looking for an issuer with a double-A credit is willing to take a single-A credit if it's from a recognised name. Likewise, a triple-B rated corporate issuer is more acceptable if its name is well known. The emphasis on credit research is also growing. Investors are actually interested in the story behind the rating and are no longer just taking a punt for a low credit. Yet, name recognition and branding have always been important.What is changing is that post-Emu, there will be few names with that kind of recognition. The pressure on the intermediary to explain a story is growing, as is the importance of building a relationship. A dealer now has to be able to react and turn-around a deal much more quickly than previously. Fergus Kiely, MTNs at HSBC Markets agrees. He says: "You used to get enquiry, now you've got to go out and sell. It's no longer a market of order-taking but a market of selling." Yet, the credit-effect spills into other areas of the market too. Kirsty Traill, executive director at Sumitomo Finance International, says: "Investors are becoming more educated about credit in general, one of the results being that levels of subordination will be of greater importance." This is something which is tipped to really come to the forefront in the next six months. Although typically the MTN market is a high quality market, there are those dealers who consider the influence of credit to have spread so far that they are bandying about terms such as junk and high-yield. The Euro-MTN market has got a long way to go before it is like that of America in terms of structured vs. plain vanilla issuance. But, what is the story regarding credit? Matthew Carter, director, fixed income at Credit Suisse First Boston, says: "The one old platitude that everyone wheels out is that the Euro market will become more like the US market. Ultimately, this may be true. But in the short-run there'll be so many anomalies within the Euro that having a clearly defined credit curve is a way off." There is also still a lot of concern regarding Japan and Asia. This, and the spill-over effect on emerging markets such as Korea, Indonesia and Russia, prevents many credit structures from seeing the light of day. One dealer draws comparisons between the current Euro-MTN market and that which burnt out in 1994, something which, if true, suggests a decline in structures as a whole. This can be argued either way. The market is different to what it was and when investors take a bet now they tend to risk their interest and not their principal. The combination of the market's current, and probably future, low interest rates, plus the fact that the Euro will have an initially deflationary effect is drawing investors to buy yield-enhancing securities. However, developments in Japan will still be key in determining what happens to the market going forward. For many experts they do not bode well. There is a general reluctance among Japanese funds to buy Euro-MTNs and dealers have recently been seeing a knee-jerk reaction in the move to triple-A issuers by investors. Mark Ames, director, fixed income at Lehman Brothers, says: "We're not totally out of the woods yet with regards to Asia. At best, Asia's will be a very slow, gradual return." Meanwhile, the mainstream of the Euro-MTN market and the stock market are somewhat over-valued. There is the potential for a market correction and one dealer even suggests there is the possibility of a bear market. In light of the fact that for the past few years there has been a sustained bull market, this idea is not too far-fetched. There are some smaller MTN houses which complain of doing trifling short-dated deals and not enough meaningful long-dated trades. Experts are bringing into question the profitability of doing trades since rumour has it that some dealers do business at a loss to themselves. The fee which an issuer has to pay a dealer to get the deal done is not often worth taking. If nothing else, Myles McBride, manager, at Citibank agrees with the idea that this year the market may slow-down or even plateau. He says: "Outstandings have risen at a slower pace in the first half of 1998 than they have done previously, due to Asia or whatever else it might be. Doubling outstandings on a yearly basis is going to be harder and harder to achieve. When Euro-MTNs become the size of the entire bond market, where do you go from there?"
July 28, 2000
