U.K. Borrowers Court Investors Willing to Put Brexit Behind Them
(Bloomberg) -- British companies’ increasing debt supply is attracting foreign investors willing to look past the stigma of Brexit.
Non-financial corporates in the U.K. including Tesco Plc and motoring firm AA Plc have raised more than $5 billion from euro and sterling-denominated issues this year, more than double the amount offered last January, based on data compiled by Bloomberg.
With the promise of a pick-up for yield-starved investors and a Brexit deal in place, U.K. firms have the chance to further boost supply of new debt and lure portfolio managers that have shunned them since the vote to leave the European Union in 2016.
“Due to Brexit, many portfolios in continental Europe had an underweight on U.K. corporates,” said Eric Vanraes a portfolio manager at Eric Sturdza Investments, which oversees $2.9 billion. “Now that the uncertainty is over, we will buy into opportunities in the primary market without a lot of questions regarding Brexit.”
The reluctance to buy the debt of British companies and other sterling issuers has a name in the parlance of analysts, who refer to the “Brexit premium” when talking about the impact of the U.K.’s departure from the EU.
The concept captures concerns about the loss of economic opportunity for British firms who face greater hurdles for doing business in Europe.
While the metric is hard to pinpoint, its effects are real. When hedged for fluctuations against the pound, high-grade euro corporate bonds stretching five to seven years offer a yield of 0.9% compared to 1.2% in their sterling equivalents, according to Bloomberg Barclays indexes.
To be sure, British companies aren’t out of the woods yet, as Brexit slows down factory deliveries and hits exporters with complex paperwork and the coronavirus pandemic slams consumer demand.
Even so, some buyers are coming round to the view that British bonds are good value.
Vanraes snapped up part of grocer Tesco Plc’s 750 million-euro ($910 million) sustainability-linked bond issue last week and is willing to buy new subordinated bonds from British companies “if the issuer is solid.”
“There could be a chance for some corporates from the U.K. to become active in the primary market and a lot of asset managers will be less reluctant to buy,” he said.
Peter Doherty, head of fixed income at Sanlam Investments U.K. Ltd, expects more issuance from U.K. firms, but not necessarily all driven by overseas demand.
“U.K. credit looks attractive on a like-for-like basis, especially versus euro credit,” he said. “The market does not fully appreciate the strength of businesses, particularly U.K. insurers.”
Foreign investors are showing more interest in new sterling issues this year as “the rationale for this premium is fading,” TwentyFour Asset Management’s chief executive Mark Holman wrote in a note.
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