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No stone unturned
A year on from the last Top 250 Borrowers report and the issues that dominate the funding landscape remain largely the same as they did then. Concerns about the eurozone were at the top of the worry list and they are still there today, casting a long shadow that stretches far further than the continent of Europe.
Sovereigns’ ability to fund themselves at a sustainable rate – or not, as the case may be – does not just affect the governments themselves; it has repercussions that resonate deeply for institutions domiciled within their borders. Banks find themselves tainted by sovereign woes, just as sovereigns find themselves drawn deeper into the mire by the state of their banks. And all the while, corporate borrowers look on with a sense of unease.
But for every loser, there is a winner; although it has been the same select band of winners at almost every turn of the cards in the recent past. Funding costs for the US, Germany and the UK, for example, have hit historic lows, despite the former losing its Triple A rating from S&P last summer, while it has been the turn of Spain and Italy to flirt with the levels that undermined Ireland and Portugal.
Each end of the spectrum can present its own problems, however. For those at the impaired end, this is naturally the cost of funding itself, as well as access on occasion, while for those perceived beneficiaries, it can sometimes be a struggle to convince investors to part with their money for so little return – Germany, for example, suffered a number of technically failed auctions, before yields took yet another leg down as eurozone concerns mounted.
It is, however, self-evident which one is the more enviable position, and the knock-on effects on government-related issuers have reflected this. Fannie Mae, risen from the ashes of 2008 and with ties closer to the authorities than ever before, is now viewed as boring (and therefore sexy), while others largely reflect the state of their guarantors.
As for the European supranationals, the reception they are afforded depends mainly on their perceived closeness to the centre of the eurozone crisis – a moving feast, if ever there was one.
For the banks, however, much of the pressure was relieved by the LTRO initiatives, although there still remains the unknown of what will happen when the three years are up and a lingering suspicion that kicking the can down the road has become a central tenet of European policy-making.
Meanwhile, those banks with market access and a desire to prove it have relied increasingly on secured funding in the guise of covered bonds, the senior unsecured market now virtually a ghost-town.
With bail-in discussions regarding senior bondholder burden-sharing nearing a resolution, it is likely that the gulf between the haves and have-nots will become even more pronounced.
And banks’ needs to boost capital ratios in the brave new world have affected lending decisions and changed the way in which the corporate sector operates.
Loan volumes in EMEA at end-May, for example, were down 37% on 2011. While some banks have made an attempt to carry on in the hope of capturing ancillary business, much of the European landscape has a distinct pre-euro, more parochial feel about it.
There are exceptions, of course, but the feeling is that major M&A deals will be few and far between and that it will be Asia that is more likely to throw up opportunities, as companies take advantage of low equity valuations for inorganic growth, such as was the case with Shanghai-based Bright Food’s play for Weetabix.
In fact, Asia is playing an ever greater role as issuers look to diversify away from previously reliable funding sources that no longer offer the certainty they once did.
One much-vaunted avenue example is the Dim Sum market. No longer just a curiosity or pure currency play, it has certainly come of age. Elsewhere in Asia, the Sharia-compliant market is also playing an important role in offering diversification away from hitherto mainstream funding avenues.
The sukuk sector is expected to produce US$44bn of issuance in 2012, significantly up from the previous year’s US$26.5bn. While Kuala Lumpur is still front and centre of the asset class, accounting for 60% of the paper, other jurisdictions, most notably Hong Kong, Sydney and Tokyo, are looking to break into the market.
Diversification seems to be the name of the game. No matter what nationality the borrower, it is ever-more essential for it to display flexibility and ingenuity. Gone are the old days of certainty; the crisis and eurozone situation have put paid to that.
Now, while Plan A may still work, it is essential to have not just a Plan B, but a Plan C and D as well.