IFR Outlook for International DCM Roundtable 2015
IFR’s Outlook for International Debt Capital Markets Roundtable took place on November 5, so the comments that follow were current as of that date. The discussion focused on the multiple themes that surround the bond market at a difficult but fascinating time. At the time the roundtable took place, we were then as now waiting to see if the Fed proceeds with tightening moves and if the ECB continues with easy money.
- View the highlights video below
That uncertainty at a macro level was already creating valuation discrepancies and leading to market volatility and broad spread widening. In the primary market, levels of over-subscription were waning and investors were starting to demand higher new-issue premiums. In some cases, buy-side demand was insufficient to propel bond offerings over the finish line with any conviction; something that had not been seen for some considerable time. The days of the easy seller’s market have passed.
Issuance volumes year-to-date are down on 2014, which had set all-time records. Nonetheless, investment-grade corporates have had a good run and for much of the year have been able to hit the market in style and garner good levels to refinance, pre-finance or fund takeovers or other types of event-driven activity.
Panel participants pointed out that while in the broader and deeper US domestic bond market, issuers and investors tend to be able to ride out bouts of volatility – though that notion was sorely tested into the fourth quarter – a small shift in volatility as measured by the VIX index tends in Europe to curtail issuance and push it back to calmer times. Timing has become much more important as susceptibility to window markets increases.
The bête noire of secondary liquidity came up in discussion; inevitable given the huge play this theme has been given all year. While it’s undeniable that dealer liquidity in the market-making book has massively declined owing to regulatory capital issues, there was a feeling that in fact what we are moving towards is in some ways a more sustainable market geared to buy-and-hold investor behaviour than to the flipping circus the market had in the past resembled on occasions.
In today’s market, syndicate managers are paying more attention to making sure paper is allocated into safe hands. That said, investors continue to complain about their inability to source paper in size although for the foreseeable future it looks like the game is going to stay the same, while alternative solutions such as electronic bond trading won’t offer ready-made solutions at this juncture.
From a buy-side perspective, buy-and-hold tends to mean higher cash balances to meet redemptions, with a compensatory and counter-balancing skew to higher-beta assets. Or it means recourse to credit exposure through synthetic markets in credit derivatives.
As for 2016, the panel was relatively bullish. We can expect a similar quantum of debt issuance to this year in SSA and corporates with the wild card being the FIG sector as a clearing picture around TLAC and (in Europe) MREL pushes financial issuers into the market potentially in size as they start to pay heed to their capital buffers in the run-up to the start date of 2019.