M&A, Refis Offer Late Boost for Slow Euro Corporate Debt Sales
(Bloomberg) -- European firms seeking to get ahead of painful interest rate rises should mean a lackluster year for euro corporate debt deals ends on a brighter note.
Companies have largely sat out an active 2021 for Europe’s syndicated debt market, pricing just under 200 billion euros ($232 billion) of euro high-grade debt versus a hefty 330 billion euros by the same stage of 2020. Wider sales including from financial firms trail last year’s pace by 3.5%, compared with the 40% drop in corporate issuance.
Yet many market participants are bullish on the prospect of issuance activity in the final three months of the year, with increasing merger and acquisition activity and the likelihood of higher funding costs in 2022 set to be the key drivers of an upturn in sales.
“If funding conditions remain as attractive as they are today, I suspect that many companies will accelerate their issuance activity,” said Tomas Lundquist, head of European corporate debt capital markets at Citigroup Inc. “Companies who had originally planned to issue in the first half of 2022 will probably consider coming to the bond market as soon as possible.”
Firms including Comcast Corp. and Eli Lilly & Co. took advantage of euro funding costs at three-month lows versus U.S. rates to price euro deals in September.
The rates outlook “is the big question mark,” said Helene Jolly, head of EMEA investment-grade corporate syndicate at Deutsche Bank AG. “If we start seeing the rates environment changing drastically, and seemingly continuing to increase, you could see some 1Q activity brought forward.”
Surging inflation from higher energy costs is prompting a debate about whether central banks need to act. European Central Bank President Christine Lagarde echoed comments from Federal Reserve Chair Jerome Powell when she described price pressures as “largely transitory.” Nonetheless, some of her colleagues have voiced concerns that official inflation forecasts will prove too low.
In the U.K., traders are betting that the Bank of England will hike its key rate to 0.75% by the end of 2022 from 0.1% currently.
The rates picture and central banks’ signals will be a strong theme into the fourth quarter, said James Cunniffe, director for corporate syndicate at HSBC Holdings Plc in London. “Issuers are thinking more strategically in terms of their funding -- hybrids, liability management -- it is all about the relative efficiencies and liquidity across markets,” he said.
The final quarter of the year typically sees lighter deal volumes due to October’s earnings blackout and Christmas holidays. That was evident in 2020, when firms priced just 40 billion euros of bonds in the final quarter -- the lowest in five years -- even as annual marketwide sales smashed all previous records due to a pandemic-induced funding dash.
In fact, this year, debt may mature faster than it’s refinanced, resulting in negative net supply, according to Jeff Tannenbaum, Bank of America’s Corp.’s head of EMEA capital markets. Firms face 24.6 billion euros of redemptions between now and January.
Still, M&A could yet hold surprises for the final quarter of the year. The third quarter for example found German landlord Vonovia SE raising 5 billion euros from a five-part deal to boost its stake in acquisition target Deutsche Wohnen.
The $1 trillion of takeovers announced this year puts Europe on course for its highest annual total since before the financial crisis, according to data compiled by Bloomberg.
“That is the type of activity that may prompt issuance as we go into the end of this year,” Tannenbaum said. “We are hoping the M&A environment does continue to be at a decent level.”
Elsewhere in credit markets:
Three issuers will price at least 3.08 billion euros of bonds across four tranches on Monday. That includes a 2 billion-euro deal from the European Stability Mechanism.
- High-yield bond sales may be the flavor of the week in Europe’s primary corporate space following a range of new mandates announced on Friday
- The pipeline added notes from companies in the telecommunications and home building sectors
- German apartment landlord Adler Group SA has started a strategic review, which could lead to asset sales with potential proceeds used to redeem or buy back bonds
- More than 13 years after Lehman Brothers filed for bankruptcy, the fight for the last scraps of its carcass is still going on
- Global issuance of sustainability-linked loans soared 263% year-on-year to almost $305b even as the third quarter saw volumes dropped from previous three-month period due to annual slowdown during summer
The primary Asian dollar bond market got off to a very quiet start to the week, with investors closely monitoring the debt problems of China Evergrande.
- Shares of China Evergrande Group have been halted pending “inside information about a major transaction,” according to Hong Kong stock exchange filing
- Evergrande has already fallen behind on payments to banks, suppliers and holders of onshore investment products, and hasn’t given any indication that it paid two recent dollar bond coupons
- Huarong’s dollar bonds jumped as much as 3 cents on the dollar early on Monday after the firm said its shareholders are set to consider a proposal allowing the company to sell as much as 70 billion yuan of bonds
Wall Street syndicate desks expect to see $90 billion to $100 billion of fresh U.S. investment-grade bond supply in October, with as much as $20 billion of that lining up this week.
- That’s higher than the $80 billion that priced in October of last year and significantly more robust than the $68 billion that came in 2019, according to data compiled by Bloomberg
- Rising rates are top of mind for issuers after the 10-year Treasury yield crossed above 1.5%. The belief that borrowing costs could continue to rise is likely to spur more issuance
- U.S. high-yield bond volume of $25 billion and $50 billion is expected in October, according to five Wall Street banks and research desks surveyed by Bloomberg
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