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US and European corporate bond markets have started September with a bang, as high-grade companies rush to exploit strong investor demand for debt ahead of possible interest rate rises on both sides of the Atlantic.
Investment grade groups in both regions have emerged from the summer lull eager to tap debt markets during a period of relative market calm before major interest rate decisions from the US Federal Reserve and European Central Bank.
Barclays, Nestlé and Toyota in the US and Ferrovial, Rexel and Assa Abloy in Europe were among companies issuing debt on Wednesday. That comes after around $34bn worth of investment grade debt was issued in the US on Tuesday, ranking it among the 10 strongest days in the history of the corporate bond market, according to JPMorgan. According to LSEG, it was the busiest day in more than three years.
“On the issuer side, no one is thinking that rates will come down soon — they need to do what they can and raise money when demand is strong, which it is,” said Matt Thomas, head of corporate debt capital markets at Barclays.
“European [investment grade] corporate issuers have been extremely active in the new issue markets over the past 10 days,” Thomas added.
Debt investors are keen to lock in the historically high yields on offer from corporate issuers, while a spate of robust data has eased concerns about a hard economic landing. US investment grade borrowers are currently paying a premium of 1.22 percentage points on average over government debt, down from 1.51 percentage points a year ago, reflecting investors’ growing optimism about the health of the US economy.
Now even cautious investors are being tempted into the market by the yields available.
“I’m on the bearish side of neutral in terms of the economy [but] the opportunity set [on investment grade debt] is as good on an ‘all in’ yield basis as it has been since the early 2000s,” said Jon Mawby, co-head of absolute and total return for fixed income at investment firm Pictet.
High-yield company defaults are on the rise both in Europe and the US, however, with smaller companies in particular buckling under the weight of higher financing costs and slowing demand.
“I get the feeling that a lot of businesses aren’t going to be able to survive the higher for longer rates environment,” said Armin Peter, global head of syndicate at UBS.
“There will be refinancing problems at some point, maybe in the second half of next year, so more companies feel better about coming to market right now,” he added.
After a normally quiet period in August, corporate debt markets typically spring back to life in September. But analysts who expected a strong start to the month said that this year more companies than usual are seeking to raise funds because of nerves around stubbornly high inflation and its impact on the future path of interest rates and economic growth.
“Corporates are looking at this post Labor Day window as an opportunity to get in front of potential uncertain economic trends,” said John McClain, portfolio manager at Brandywine Global Investors. “For IG borrowers, the game plan is to lock into the environment we currently have.”
“Investors like risk at the moment,” added Joost Beaumont, an analyst at ABN Amro. “There’s been a flurry of smaller, weaker-rated banks coming to the market with relatively risky debt and they’re attracting demand. It’s a similar story across the wider corporate debt market.”
Brandywine’s McClain added that he expected the benign environment to tempt more junk issuers to come to market: “While ‘all in’ borrowing costs are materially higher than they were 18 months ago, I think that the receptivity of [the] market for issuance is as strong as it’s been over the past 18 months.”
Beyond mainstream borrowing, corporate treasurers are also engaging with other types of debt financing. The total value of ESG bonds outstanding reached €1.7tn in June, up 28 per cent in a year, according to data from the European Securities and Markets Authority. Nordea Bank issued a novel sustainability-linked loan bond in the last week of August that attracted “robust investor demand”, Beaumont said.
Stephan Ertz, head of credit at Union Investment, said that retail and utility companies had been leading the charge in Europe for new issuance in recent weeks, and that the most attractive deals were among non-financial higher-risk investment grade bonds.
“Concessions on non-financials are higher currently than on financials,” said Ertz, who bought VW’s bond issuance last week. “The most interesting issuers are those in investment grade with a high spread — let’s say BBB rating,” he added, noting that issuances from SEB and Eon had not performed well.
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