Brexit May Risk No-Deal Bond Market as Uncertainty Lingers On
Brexit May Risk No-Deal Bond Market as Uncertainty Lingers On
(Bloomberg) -- Europe’s bond market may face an early year-end shutdown as Brexit risks cloud the outlook for borrowers and investors.
Companies may hold off issuing notes, particularly in sterling, as uncertainty about the U.K.’s future trading relations with the European Union forces them to delay decisions about new plants and equipment. Investors may also be reluctant to deploy funds if the U.K. fails to reach a divorce agreement due to the risk of an economic slowdown or potential turmoil in bond and foreign-exchange markets.
“A no-deal Brexit would result in a lot of volatility,” said Marco Baldini, head of European bond syndicate at Barclays Plc. “It wouldn’t just be the sterling market that would be affected either -- the euro market would be hit just as badly.”
Corporate sterling bond sales have slumped 34 percent this year, according to Bloomberg league table data, double the drop-off in the euro market, as Brexit concerns deter U.K. investments. Airbus SAS, Schaeffler AG and Smurfit Kappa Group Plc are among companies that have scaled back operations in the country or warned about potential cuts amid a lack of clarity about trade ties after March.
“Issuance is down primarily on that uncertainty,” said David Katimbo-Mugwanya, a fund manager at Edentree Investment Management Ltd., which oversees about 2.7 billion pounds. “The lack of a divorce deal could well push more issuers to the sidelines.”
U.K. Prime Minister Theresa May has begun briefing her cabinet on the text of a near-complete Brexit deal, as she seeks to smooth the country’s departure from the EU. She faces the challenge of garnering support from hard-liners in her own party, as well as finding a way of avoiding a hard border between Northern Ireland and the Republic of Ireland.
Failing to square this circle could disrupt Europe-wide supply chains, ground U.K. flights and hinder transactions in the continent’s London-centered financial markets. Investors in the foreign-exchange options market also expect pound volatility to pick up, with a one-month gauge near the highest since February.
Sterling bond spreads have widened to 151 basis points this year, based on a Bloomberg Barclays index data. A no-deal could force central-bank action, which would ease some of the pain for bondholders, said Paola Binns, a senior credit fund manager at Royal London, which oversees 117 billion pounds.
“They wouldn’t just let asset prices collapse,” she said. “You’d expect some sort of intervention through QE.”
Investors are also still lapping up sterling notes amid the limited supply. Insurer Legal & General Group Plc got more than 2.2 billion pounds of bids for a 400 million-pound sale this week. An offer from TC Dudgeon OFTO Plc, the operator an offshore power-transmission line, was more than double subscribed.
The U.K. may be able to secure a divorce agreement, and May could visit Brussels within days to trigger the final phase of negotiations, according to EU officials. The risks posed by a no-deal divorce may also persuade U.K. lawmakers to back any accord.
A divorce agreement could help revive sterling bond sales. Still, the need for a permanent EU-U.K. trade agreement will continue to cause uncertainty and drag on issuance, said Katimbo-Mugwanya.
“The avoidance of a no-deal scenario will be a good thing, and you could see some issuers step back in,” he said. “But they’d want to get a feel for how trade negotiations are progressing before coming back fully.”
To contact the reporter on this story: Emma Haslett in London at ehaslett@bloomberg.net
To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, Neil Denslow
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