IFR DCM Special Report 2015
Shape-shifting: The debt market is a singular animal: no matter what situation arises, it simply evolves in order to address it.
When times are good, it takes little in the way of ingenuity to navigate around the sector. But when the environment becomes more challenging, be it for reasons that are economic, regulatory or whatever, that is when inventiveness and lateral thinking are thrust to the fore.
While the US dollar investment-grade market was a classic example of the former, its record-breaking run during the first half of the year was abruptly disrupted by volatility engendered by concerns surrounding China. The spectre of the Federal Reserve embarking on its tightening programme – for so long the elephant in the room – took on renewed importance, and what had been an environment where huge M&A trades had almost taken on an air of mundanity suddenly became one where deals were difficult to place and judgement was once more a valued commodity.
But other areas have been weighed down by their own problems throughout the year. Emerging markets, for example, saw issuance volume drop 34% in the first six months of 2015 compared the same period in 2014. Russia, for so long the mainstay, was impacted by sanctions, while any high hopes for Brazil evaporated in the Petrobras scandal. And then there was China.
In Europe, the problem was of an altogether different nature. The early days of the ECB’s quantitative easing initiative, aimed at easing market access, caused spreads in public sector debt to collapse, thus actually creating difficulties for SSA issuers looking to fund in the single currency.
The almost inevitable bounceback saw some stability re-emerge, although market participants had to be more flexible than perhaps they would have envisaged in such a sector, with the euro versus dollar paradigm constantly shifting as newly arrived QE vied with recently departed QE.
And all this was taking place while negotiations with Greece were rumbling on in the background, the sanctity of banks’ senior debt was being called into question and random events such as the VW emissions scandal and Glencore’s commodity-induced hiccup threw up further uncertainty.
No asset class remained unaffected, although neither did this hamstring the market in its entirety.
Issuers, lead managers and investors alike needed to be nimble and flexible. Timing was key, with the right decisions required at the right time. Naturally, this did not prove to be a perfect science, although each experience became part of a learning curve as market participants evolved their approaches to overcome the problems they faced.
From an issuer point of view, the days of announcing a trade and waiting for a stampede of orders became a distant memory. Choices of tenor and currency assumed renewed importance – rather than being a simple case of rotation or personal preference – and careful attention had to be paid to a buyside that for its part needed to manipulate mandates to best effect in what remained a low-rate, low-spread environment.
The primary arena, always a central part of the market, took on even greater importance as concerns prevailed around secondary liquidity.
The past eight, post-crisis years have seen banks’ inventories shrink to a fraction of what they were and various initiatives – mainly on the e-trading side – have so far failed to address the situation to universal satisfaction. Myriad platforms have come; nearly as many have gone – and still no one solution has been found.
But such is the nature of the beast; the debt market is never a straightforward proposition. As ever, both in both the primary and secondary arenas, it has been the grey areas that have required the greatest use of grey matter.
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