Pound Bond Sales This Year Top 2020’s Total Amid Rate Hike Fears
Sterling-debt sales by corporates exceeded 2020’s annual tally as borrowers rushed to secure ultra-cheap funding costs while they still can.
Offerings will top 71.1 billion pounds ($96 billion) through Wednesday, beating last year’s total sales by at least 1.5 billion pounds, according to data compiled by Bloomberg. A recent surge that included deals from Banco Santander SA to Volkswagen AG also pushed September pound issuance to the highest since at least 2014.
It’s a sign that issuers are all too aware that borrowing costs won’t stay low forever, especially as U.K. government bonds, a key component in companies’ funding costs, sell off on the prospect the Bank of England may tighten policy sooner rather than later.
“The BoE’s more hawkish stance may lead issuers to believe that underlying yields will go up further, and therefore pre-empt that by issuing in the near term,” said James Solomon, a director on the syndicate desk at RBC Capital Markets.
The yield on 10-year gilts, a benchmark debt, was headed for its biggest monthly gain since February. And the average rate on sterling investment-grade corporate bonds climbed to 1.87%, according to a Bloomberg index, just short of its highest point this year. Euro investment-grade notes yield an average of just 0.32%.
Strong investor demand has been another factor supporting sterling issuance this year, not always a given in the currency.
Subordinated financial bonds have drawn particularly big order books in recent weeks: a Just Group Plc 325 million-pound Restricted Tier 1 5% perpetual note was about nine-times covered; a 400 million-pound Berkeley Group Plc green bond was more than five-times subscribed in early August.
Once you throw in ample cash to reinvest from tenders and redemptions, it’s a “perfect storm for large issuance,” said Bryn Jones, manager of the 1.8 billion pound Rathbone Ethical Bond Fund.
At the same time, the proportion of non-domestic borrowers has also increased, to about 57% this year from 39% in 2020. One example is U.S. pharmaceutical company Eli Lilly & Co., which sold debut pound notes this month.
“We have been calling out to international borrowers how attractive the sterling market is for months now,” said James Cunniffe, director for corporate syndicate at HSBC Holdings Plc in London.
Some sterling portfolio managers are expressing caution as the BOE mulls the right moment to hike rates and inflationary pressures remain high. Gordon Shannon, a portfolio manager at TwentyFour Asset Management, said he’s passing on the majority of new issues because he’s trying to mitigate duration risk in his funds.
“Generally, I want to run a portfolio with shorter-dated higher spreads, so my break-evens are higher and I have protection against a generic rise in yields,” he said. “That means mostly avoiding primary.”
Still, investors have cash they need to spend and so corporate treasurers are taking advantage of that. Ocado Group Plc and Southern Housing Group Ltd. are among the companies lining up new issues.
“If you have to issue, it makes sense to do it now, rather than wait,” Shannon said. “You’re looking at a very small amount of carry and are potentially issuing now at a much better level than in a few years’ time.”
At least 15 issuers are set to price 17 tranches on Wednesday for a minimum 7.28 billion euro-equivalent, extending a busy week. They include American Tower Corp, Banco Comercial Portugues SA and Kommunekredit.
- The European Stability Mechanism joined the pipeline, sending a Request for Proposal to banks with regards to a transaction scheduled for the week of Oct. 4
- U.K. regulators may allow firms to continue using Libor for some contracts in limited circumstances after its planned end date, an effort to ensure the transition of trillions of dollars of contracts goes smoothly
- The Financial Conduct Authority said Wednesday that it could allow dollar Libor to be used in new contracts beyond year-end for circumstances that include market making and hedging
- Some of Europe’s biggest asset managers are starting to drop a once-ubiquitous ESG label from their company filings amid concern that regulators will no longer tolerate vague descriptions of environmental, social and governance investing
There were only two Asian issuers seeking to price dollar bonds on Wednesday after markets turned risk-off amid renewed concerns about inflation and China Evergrande.
- A China local government agreed to buy a stake in a struggling regional bank from Evergrande, illustrating how authorities are taking steps to minimize any fallout to the banking system from the developer’s debt crisis
- Evergrande’s long-term issuer default rating was downgraded by Fitch to C from CC
- Spreads on Asian investment-grade dollar bonds were mixed, indicated at one basis point wider to one tighter, according to a trader
- With some U.S. Treasury yields near their highest since early 2020, concerns about the near-term outlook for Asian dollar credits is growing
Morgan Stanley and two of its top distressed-debt traders are being sued by Italian ferry operator Moby SpA, which claims it has recordings showing the bank and an investor were secretly trying to seize control of the company away from other creditors.
- The extended selloff in Treasuries that drove five-year yields to fresh 19-month highs on Tuesday was just too much for some investors, who jumped in and stanched the bleeding
- Ultra-low interest rates globally have sparked a new credit cycle for the leveraged loan market
- That’s the sentiment of some of the biggest names in the $1.2 trillion market who spoke at a Bloomberg News leveraged loan conference on Tuesday
©2021 Bloomberg L.P.