Companies Rush to Sell Europe Bonds in Last Pre-Brexit Window

(Bloomberg) --

Europe’s red-hot company bond sales have made a fast start to usually quiet October. How long the pace will last is less clear.

Investment-grade companies sold almost 10 billion euros ($11 billion) of bonds in the first two days of the month, almost double the total for the opening week of October last year, even after a flood of September deals. More offerings may be on the way after a German holiday on Thursday, with CK Hutchison Holdings Ltd., Dell Technologies Inc. and auto-parts maker ZF Friedrichshafen AG among borrowers readying potential sales.

The busy October opening “shows that yield-hungry investors’ appetite for paper has yet to abate despite the record-breaking deluge in September,” Commerzbank AG strategists including Michael Leister wrote in a client note. They expect sales to slow in the second half of the month when more companies enter earnings blackouts.

The post-summer deal rush has been stoked by borrowers grabbing what may be a last chance to lock in ultra-low funding before Brexit and potential economic risks, as many issuers will be shut out of the bond market once earnings season arrives. Companies such as WM Morrison Supermarkets Plc and AIB Group Plc have fanned the deluge by refinancing notes not due for months, potentially suggesting that little will be left in the tank for the rest of the quarter.

“Many will have decided it was best to lock in issuance in September, ahead of the Brexit deadline,” said Hans Peter Lorenzen, credit strategist at Citigroup Inc. That means “most issuers don’t have an imminent need to come to the markets,” he said.

Low investment levels amid a slowing economy are also likely to drag on issuance, according to Jeroen van den Broek, a strategist at ING Groep NV.

Companies have already syndicated about 675 billion euros of investment-grade bonds in euros, pounds and dollars in Europe this year, compared with 645 billion euros for the whole 2018, according to data compiled by Bloomberg. There was only 101 billion euros of sales in the fourth quarter of last year. December holidays and earnings season usual cool issuance in the last three months of the year.

Low Funding Costs

Fourth-quarter optimists point to still low funding costs and the European Central Bank’s plans to resume bond buying next month. That could encourage issuers to look at replacing debt not due for a year, according to Suki Mann, the founder of Creditmarketdaily.com.

Irish lender AIB on Wednesday sold an Additional Tier 1 note more than 12 months before it can redeem a similar bond. It set a coupon of 5.25% on the new note, compared with 7.375% on the old one.

Euro investment-grade borrowing costs are around 0.4%, versus about 1.4% in early January, according to Bloomberg Barclays index data.

Possible central-bank action in the wake of a disruptive no-deal Brexit could also boost the case for fourth-quarter issuance by driving borrowing costs even lower. The Bank of England, for instance, could take action amid market upheavals and cut rates, according to Marco Baldini, head of European bond syndicate at Barclays Plc.

Still, for the time being bond buyers are focusing on the steady supply of new deals rather than worrying too much about what lies ahead, he said.

“Investors have put any concerns around Brexit to one side,” he said. “I wouldn’t expect this situation to change until toward the end of October.”

To contact the reporter on this story: Priscila Azevedo Rocha in London at pazevedoroch@bloomberg.net

To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, Neil Denslow

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