This report takes a comprehensive look at what lies ahead in 2014.
To see the full digital edition of this report, please click here.
To purchase printed copies or a PDF of this report, please email email@example.com
This report takes a comprehensive look at what lies ahead in 2014.
To see the full digital edition of this report, please click here.
To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email email@example.com Lending conditions in Europe’s syndicated loan market are ripe for more M&A activity in 2014 amid more positive macro conditions, banks’ renewed enthusiasm to underwrite and a host of cash rich investors eager to put money to work. Corporates and sponsors are taking advantage of a myriad catalysts for M&A to occur and a pipeline of event-driven transactions is building, after a 2013 dominated by refinancings. “Loan markets across all sectors remain quite robust as we enter 2014. European borrowers have taken advantage of newly available options to tap alternative markets such as the US loan market and bond markets. Provided we benefit from a degree of economic stability throughout 2014 – including even modest economic recovery – we should see a build-up of the M&A pipeline,” Chris Lovgren, global head of loan syndications at Natixis said. In high grade, UK engineering firm AMEC’s proposed US$3.2bn cash and share offer for Swiss peer Foster Wheeler is backed with a £1bn plus debt financing. The US$1.595bn cash component of the offer will be funded through existing cash and the new financing. ”Borrowers are looking for low-cost, callable-at-par financing options while investors are looking for attractive relative-value products in floating rate form” In leveraged, private equity firm Dering Capital is in advanced talks to buy French broadcasting masts operator TDF and has approached banks to provide a debt financing which could total around €2bn to €2.5bn. Other potential deals include the potential sales of German packaging group Mauser by Dubai Holding, German skin patch maker LTS Lohmann and Nordic payment services company Nets Holding. “M&A is expected to increase in 2014 and around 35%–40% of activity during the first quarter is likely to be event-driven transactions. It was a record year for bond issuance in 2013 but the loan market also surprised many people by achieving the largest volumes since 2007 and we expect a further significant shift towards loan product in 2014,” Mathew Cestar, head of leveraged finance in EMEA at Credit Suisse said. ”Borrowers are looking for low-cost, callable-at-par financing options while investors are looking for attractive relative-value products in floating rate form.” Desire to underwrite After a period of balance sheet reduction, banks’ willingness to underwrite is at a six-year high, driven by banks wanting to rebuild portfolios, boost interest income, as well as bolster relationships with key clients amid improving capital positions and reduced funding costs. Institutional investors are also stepping up efforts to lend, attracted by good yields on senior, floating-rate paper. US and European institutional investors are competing to finance transactions in Europe beyond the traditional leveraged transactions into crossover credits and infrastructure deals. Competition from different sources of liquidity means 2014 will be a borrowers market if macro conditions remain positive. Loans are expected to get more aggressive in terms of pricing and documents. “A tightening of monetary policy in the form of tapering, even a modest taper, could result in rising yield requirements. This would make recourse to debt capital markets more expensive and potentially put a break on M&A activity. However, this could be compensated by an overbanked European market suffering from low deal volumes, as bank liquidity is expected to remain substantial throughout 2014,” Lovgren said. Claire Ruckin; Alasdair Reilly
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org 2014 is expected to be another year of heavy activity in the syndicated leveraged loan market, with volume potentially hitting US$1trn, the second-highest level on record, following the all-time high US$1.14trn issued in 2013. Issuers will continue to take advantage of low borrowing rates and robust loan demand to cut costs and extend maturities. However, issuance is expected to expand from repricing and refinancing into other uses of proceeds, including mergers and acquisitions. Leveraged loan demand in 2013 largely stemmed from investors starving for yield and aiming to hedge against an eventual rise in short-term interest rates. Enhanced credit profiles, an uptick in capital expenditures from low levels in 2013 and a low default environment are also expected to support another year of healthy issuance. Uncertainties about when the Federal Reserve will begin raising short-term interest rates will likely continue to support demand for the floating-rate leveraged loan product. The effect of new CLO regulations on the leveraged loan space will be the wild card. Risk retention rules may chill the CLO market by lowering the demand for new loans. However, CLO issuance could be pulled forward in 2014, as these requirements would only become effective two years after the final adoption of the rules. Banks are in varying stages of Basel adoption and many see this as the catalyst that could lead to changes in capacity and terms and conditions Pressure on banks to increase lending standards could weigh on loan issuance. Regulatory pressures may restrict private-to-private leveraged buyout deals more than public-to-private LBO transactions in 2014, given that the former carry higher leverage. Pressure from regulators could also shift some lower-quality loan supply to the bond market from issuer-friendly features, such as covenant-lite packages. New-issue activity tied to M&A is also expected to permeate the middle market space, which is ripe for a more fruitful M&A environment in 2014. This, as the long hovering fog of uncertainty that has stymied investment activity appears to be lifting, giving way to improved visibility for lenders, borrowers and private equity sponsors alike. Increased economic confidence, more certainty with respect to the Fed tapering, and fewer concerns about a potential government stalemate over the budget are paving the way for greater willingness to buy, sell and invest in middle market companies. Refinancing slowdown In the investment-grade market, lenders anticipate a slowdown in refinancing activity and are hopeful that M&A lending will maintain momentum to reach an estimated US$160bn, up from US$133bn in 2013. However, though dialogue with clients regarding refinancing and potential M&A transactions is ongoing, there is little visibility on whether it will translate into new activity. Despite intense competition among banks to lend, pricing and tenor are expected to remain fairly stable as issuers continue to pursue extensions to push out tenors. Bankers are optimistic that volumes in 2014 will be stronger than the last two years. Banks are in varying stages of Basel adoption and many see this as the catalyst that could lead to changes in capacity and terms and conditions. Michelle Sierra, Natalie Wright, Leela Parker Deo
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email email@example.com Of the US$119.2bn of accelerated trades in EMEA in 2013, about US$22bn was derived from a blind auction, where bankers are given a short period of time, often less than an hour, to guarantee a minimum price for an offering of stock. Some banks argue that competition under these circumstances results in overly tight bids aimed at ”buying” league table credit by banks playing catch-up, rather than designed for successful distribution. With private equity selldowns and government privatisations likely to feature heavily in this year’s pipeline, few expect to see a contraction in auction-based blocks, despite a number of high profile failures last year. One measure to improve outcomes in 2014 is the submission of ”exploding bids” in auctions: a bank puts a time limit on the validity of its bid. If the deal has not launched in time, the bid expires. “Most banks, if not all, would include some kind of deadline on risk bids in an auction. Otherwise it is a put with no expiration,” said the head of syndicate at a US bank. “The success or failure of pricing a block at a tight discount can depend on the time of launch and that is out of your control. The difference between launching at 5pm or 7pm can be very meaningful.” A senior European ECM banker said the “addressable universe of European fund managers begins to erode from 5pm onwards”. Putting a deadline on a bid installs discipline with the vendor to ensure the timing of launch is reasonable. “When we’re asked to underwrite a placement, we have a strong preference for launching immediately post-closing or very shortly thereafter,” said Craig Coben, head of EMEA ECM at Bank of America Merrill Lynch. “A late launch can prejudice the execution, resulting in worse pricing. If a vendor organises an auction process, we don’t think it’s unreasonable to ask for a timely response to enable us to launch when investors are reachable at their desks.” Banks are still happy to provide compelling price guarantees if they can avoid an auction and late night launch. “Our approach is to be extremely proactive and try to bid the seller ahead of an auction,” said Luca Erpici, European head of equity syndication at Jefferies. “We believe we can give them a better price based on our knowledge of the stock and potential buyers and reduce risk that way. We believe risk is about distribution.” Whether putting more controls on timing will reduce risk and instil more discipline in banks that have, to date, looked to others to restrict their excesses, is questionable. Nonetheless if it can take time out of the equation then it should moderate some losses – even if that does also remove a handy excuse for when things do go wrong. Robert Venes
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org Last year’s revival in the European securitisation market was notable more for breadth of issuance than volume – the €75bn–€80bn placed was flat to 2012. The fully fledged return of CLOs and CMBS, as well as renewed activity in the peripheral sector, were significant developments. In 2014, the core products of Dutch and UK RMBS (some UK non-conforming supply is expected against a smattering of prime issuance) and auto ABS will nonetheless continue to dominate, though structured finance will still struggle to overcome price competition from other markets. “Banks that were historically active issuers of securitisation may not be convinced by the current relative value of issuance versus covered or senior bonds if funding is the sole objective,” said Allen Appen, head of FIG DCM EMEA at Barclays. But a seller’s spread disadvantage works in a buyer’s favour. “The market provides some relative value plays, especially versus unsecured and covered bonds, which should draw investors in,” said Daniel Pietrzak, co-head of structured credit at Deutsche Bank. And of course the ABS banker’s pitch has never solely been about price. “What is encouraging is a potentially significant move towards reliance on securitisation to manage balance-sheet pressures,” said Appen. Getting seniors interested European ABS is still fighting an uphill battle against official sector’s apparent disapproval. Basel, EIOPA and EBA suggestions at the end of 2013 show some policy easing towards securitisation, but the sector remains at a disadvantage versus covered bonds – a fact that remains a sore topic for the ABS community. “There is still lots of regulatory uncertainty,” said Jim Ahern, global head of securitisation at SG. “The regulators are defining our product as illiquid, which will have a negative impact on both trading and investment in the product for banks and insurers.” Restricting liquidity for banks will also affect their ability to ramp up lending. “When the regulatory regime is fully implemented the European banking system may struggle to meet the needs of an expanding economy. Economic expansion will require incremental credit transmission, and a fully functioning European securitisation market could potentially fulfil that [role],” said Appen. The SME sector, which drives Europe’s economy, and related securitisations have received some support from the ECB and are expected to feature in 2014, but their format and even investor base remains uncertain. Standardising SME securitisation could be tricky given the variety of loans types (size, sector, whether they are secured by real estate, etc). Granting European RMBS more reasonable capital and liquidity treatment would promote its use as a source of funding to free up bank lending capacity, which in turn could flow to SMEs, Ahern said. Spanish issuers were regular securitisers, and are anticipated to feature in 2014, but not all in public format. “I do expect more periphery activity as spreads have come in appreciatively, but some of these will be private transactions,” said Ahern. Transactions from Italy, Ireland, Spain and Portugal were all sold in 2013 and these countries are expected to be represented again in 2014. CMBS issuance is expected, too, given the 2014–2015 maturity timetable for legacy deals, as are infrastructure and whole business deals. CLOs should see a continued resurgence once regulatory issues such as Volcker are ironed out.
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email email@example.com Success breeds success. Last year, US stocks powered to a nearly 30% gain, the number of US IPOs hit their highest levels since 2000, debutantes produced an average return of 41% and investors finally shovelled their money back into actively managed stock funds. In ECM it doesn’t get much better than that. It is not surprising then that bankers are expecting even bigger and better fee-generating opportunities in 2014. Already in January, several US$1bn-plus IPOs have hit the road, a continuation of the fertile conditions for deal pricing seen in the fourth quarter. The ECM pipeline is also building impressively, with sectors such as energy, technology and healthcare seemingly positioned for another hectic year and big IPOs from the likes of Ally Financial and General Electric’s credit card business in the works. Perhaps the most impressive aspect of US ECM in 2013, in contrast to the prior five years, was the nearly complete absence of any periods when the capital-raising window was closed because of poor investor sentiment, even around difficult periods such as the US Congress’ bitter debt ceiling debate. Coming into the new year, investors are more composed, many having adopted the view that the crisis years are over. Volatility levels are at post-crisis lows and remain in underwriters’ comfort zone. Declining correlation (implying greater stock divergence and less of a overwhelmingly macro influence on stock prices) have brought active/stock-picking funds that are the heart and soul of ECM into their own. “By definition, IPOs are growth stocks so I think we are going to see a pretty strong bid for them,” said Joe Castle, the New York-based global head of equity syndicate at Barclays. Castle said he would be “very surprised” if US ECM volumes, which totalled US$235.9bn last year (including US$59.4bn worth of IPO issuance), are down in 2014. Momentum aside, a further spur to 2014 issuance could come from a long-awaited pick-up in mergers and acquisitions. To the surprise of bankers, the robust ECM market in 2013 was not accompanied by consistently high levels of M&A and indeed financial sponsors used ECM extensively to take advantage of what they saw as a seller’s market. Greater M&A in 2014, of which there are already some signs, would not only drive higher equity market valuations but also directly trigger ECM deals since some takeovers require equity funding. Yet after the experience of the past five years, it would be folly to assume plain sailing for ECM syndicate desks. It is unusual for equity markets to take a breather after a strong year. Indeed, US equity markets have started the year in less convincing fashion. While still calling for an up year, Goldman Sachs strategists concede the S&P 500’s forward price/earnings multiple is lofty and see a 67% chance of a 10% drawdown in stocks in 2014. There is at least one obvious threat to equity returns, and by extension, good ECM conditions. According to a BDO US survey released on January 7, 43% of investment bankers pointed to the Federal Reserve paring back its monetary stimulus as the biggest threat to IPOs The counter-argument is that investors are now well-primed for this eventuality, have to some extent factored this into valuations and will handle this outcome without panicking. Mark Hantho, Deutsche Bank’s global head of ECM, said the big question was whether tapering would prove relatively smooth or cause some pronounced dislocation, but the negative impact could prove greater in emerging markets. In recent years, banks have stepped up aggressively to underwrite risk trades, particularly by purchased blocks from private equity firms, while large investors have increasingly seen ECM activity as a not-to-be-missed opportunity to build a position of size in specific stocks. The emergence
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org China reopened its IPO market this month after a year-long ban, and 51 listing hopefuls immediately rushed to launch their transactions and tap the market’s massive pent-up demand. But the initial euphoria didn’t last long, after drugmaker Aosaikang Pharmaceutical in early January unexpectedly postponed its listing on ChiNext – a Nasdaq-style board – despite an enthusiastic response from investors. Market participants believe the company came under pressure from the China Securities Regulatory Commission. And those concerns appeared to be confirmed when the CSRC issued an urgent notice on January 12 about the supervision of IPOs. The message was loud and clear: While issuers are free to set terms on IPOs, CSRC is still monitoring the market. Any company setting an IPO price higher than the valuation of industrial peers in the secondary market must publish repeated risk warnings three weeks before opening books to retail investors. The regulator also said it would carry out random checks on price consultations and the pre-marketing of IPOs – and halt any listing that discloses information not publicly available or in the IPO prospectus. After the notice was issued, five A-share listing hopefuls postponed their floats on the eve of bookbuilding: Beijing Forever Technology, Netposa Technologies, Hebei Huijin Electromechanical, Nsfocus Information Technology and CiMing Health Checkup Management Group. No change of control The developments have sent shivers through a market whose confidence has already been badly shaken once. It is no surprise that Aosaikang caught the regulators eye. The pharmaceutical had set a high price for its IPO and significantly increased the size of the deal – to Rmb4.05bn (US$670m) from Rmb794m – while including a large number of secondary shares. The postponement underscored the fact that the regulator is not yet ready to allow for the setting of valuations freely. “When the regulators said they wanted to develop a market-driven IPO mechanism in China, they meant a mechanism which they can accept,” said a banker at one of the top investment banks in the country. “The regulators will not give up control over the market entirely until they find the investors are mature enough.” China had shut the market for more than a year, after a string of new stocks slumped, in order to weed out weaker issuers and win back some trust from investors whose faith in the process had waned. The market’s reopening has come with several strings attached. Rules introduced last November require issuers to reject at least the highest 10% of bids on new listings. Since then 40%–60% of orders were removed from final books on IPOs. The urgent notice has boosted that number further. On January 13 – the day after the notice – Beijing UTour International Travel Service, Yangzhou Yangjie Electronic Technology and Hebei Huijin Electromechanical each removed more than 90% of the total orders on their books during price consultation. “The CSRC are keeping a close eye on the pricing of IPOs right now,” said another banker. “So issuers and arrangers are very cautious on setting the prices, as no one wants to upset the regulator again.” Fiona Lau, Ken Wang
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email email@example.com In many ways the European structured equity market broke new ground in 2013 with new issuer types and structures successfully sold, but the raw data show a slightly more prosaic performance. Issuance volume rose 56.4% to over US$30bn, back in line with issuance of 2009, but the level of bond maturities, M&A takeouts and exercised calls means the net gain in outstanding paper was only about €2.5bn for the year to December 3, according to Barclays data. Since then several other firms have called bonds. Yet this is ultimately good news for new issuance as it means investors will still be chasing every deal. Investors’ appetite for new exposure is important considering the structural innovation began in 2013 and hoped to continue this year with issuance from financials. “There is the prospect for innovation in the hybrid space for financials,” said Armin Heuberger, head of EMEA equity-linked at UBS. “Additional Tier 1 capital needs loss absorption on the downside – through writedowns or equity conversion – and with an upside conversion feature on the back of strong share price performance could well make sense to reduce costs and diversify the investor base.” “In fact, investor interest in a CoCoCo has come a long way, even without a deal. A number of outrights have gone from ruling out participation to saying they could now buy such an issue.” “The mood is more amenable to innovation and choice of names and structures is likely to broaden,” said Luke Olsen, head of convertibles research for Europe and Asia-Pacific at Barclays. “We haven’t seen CB perpetuals recently, for example, but we think these could return, particularly if there is saturation in straight hybrids and rising bond yields could also make the coupon saving more interesting.” Regulatory uncertainty has restricted issuance of AT1 paper so far, but there Is already concern about capacity so a convertible hybrid may be embraced by issuers. “In fact, investor interest in a CoCoCo has come a long way, even without a deal. A number of outrights have gone from ruling out participation to saying they could now buy such an issue” Even if the CoCoCo does not arrive this year, bankers begin 2014 with more potential issuers than ever before, particularly for exchangeable bonds. There is also a large visible pipeline with Telefonica planning an up to €1.24bn mandatory as part of the acquisition of E-Plus in Germany and Fiat-Chrysler set to mark their marriage with a mandatory. “The universe of potential issuers has clearly widened due to the variety of issuance options,” said Bruno Magnouat, head of equity-linked at Societe Generale. “Mandatories, exchangeable bonds – including those from holding companies and overcollateralised – zero coupons, longer tenors. The equity-linked solution is now firmly on the CFO and CEO’s desks and it is hard to ignore.” Though the overall market grew little in 2013, this is not cause for concern. Calls increase when equity values rise, but at the same time this triggers greater issuance. Plus the redemptions expected in 2014 total just €11bn, thanks to many bonds having already been called, according to Barclays’ calculations. Owen Wild
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org After a pivotal year, in which issuance volumes reached record highs and secondary performance the worst return since the financial crisis of 2008, market participants are hoping for a turnround for emerging markets bonds in 2014. Overall primary market activity is expected to remain below last year’s highs, so an increase in non-US dollar-denominated transactions and new bank capital deals is likely to emerge as dominant themes this year. Analysts at JP Morgan expect total EM corporate issuance to decline to US$294bn in 2014, down 18% compared with last year’s US$359bn. For sovereign issuers, a 50% increase in redemptions will see issuance volumes increase slightly to reach US$85bn compared with US$78bn in 2013. Lower refinancing needs, combined with slower M&A activity, lower capital expenditure and a weaker outlook for commodity prices will all contribute to the decline in corporate issuance, said market participants. But redemptions and coupon payments estimated to reach US$137bn in 2014 – according to RBS – will leave investors with plenty of cash to put to work, especially during the first five months of the year, when most of the payments are due. In a continuation of a theme that has intensified in the second half of 2013, bankers are betting more issuers will tap non-US dollar markets, taking advantage of favourable basis swaps and a divergence in monetary policies among developed economies. “I think this might be the year when we finally see a lot more EM credits in euros,” said Eric Cherpion, global head of DCM syndicate at Societe Generale. Cherpion highlighted Gazprombank’s five times subscribed €1bn five-year issue in October as evidence that the appeal of the single currency is widening. “Everyone can live with the idea of corporates issuing in euros, but Gazprombank was one step further,” he said. As more countries follow in the footsteps of Russia with the implementation of Basel III guidelines, bank capital and subordinated bond issues are also likely to attract much attention. “Turkey and South Africa are moving into the Basel III universe, but you might see more out of Central and Eastern Europe and the Middle East as well,” said one syndicate official. Challenges, however, might arise from the buyside, where investors are going to become more selective and might require higher premiums to engage in new issues. “It’s like a New Year’s party. You have your canapes and venue ready, and you are just waiting for people to show up” “Select emerging market corporates have been very aggressive in pricing new deals last year, but you can’t continue to have negative performance and low new-issue premiums,” said Polina Kurdyavko, senior portfolio manager at BlueBay Asset Management. “You can only get away with that game for so long.” In particular, while the market backdrop is likely to remain constructive in the first half of the year, the secondary market performance of new issues will set the tone for more EM supply. “Institutional accounts want to time the market. Only when you see performance you can have a rally of some sort,” said Sergio Trigo Paz, head of emerging markets fixed income at BlackRock. “It’s like a New Year’s party. You have your canapes and venue ready, and you are just waiting for people to show up.” Davide Scigliuzzo
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email email@example.com The majority of European banks will be able to sell contingent capital bonds by the end of 2014 as politicians and regulators seek to push through legislation that will create a level playing field for hybrid issuance. Over the past year, European financials sold some €38bn through Tier 2 and Additional Tier 1 bonds and market experts are expecting that figure to more than double to €80bn–€100bn by year-end. “CoCo issuance is likely to accelerate in the first half of this year having picked up at the tail-end of last year,” said Simon McGeary, head of new products, EMEA at Citigroup. “It won’t come all at once because there are still some jurisdictions that have to resolve their tax issues but I think by the second half of the year we could be at almost a full run rate.” At the end of last year, Italian and Dutch banks got a step closer to being able to sell Additional Tier 1 bonds with both governments taking action to make it easier for their banks to sell hybrid instruments. This leaves Germany as one of the final frontiers for the hybrid product. Under the Basel III framework, banks can raise 1.5% of their 6% Tier 1 capital ratio in the form of non-dilutive equity-like instruments, which can also be used to improve banks’ leverage ratios. Until December, only banks in the UK and Spain had clarity on whether Additional Tier 1 instruments were tax-deductible, a key aspect for this type of debt as it makes it a lot more cost effective to issue. Italian, German and Dutch banks have held back these types of bonds as they have waited and lobbied for government officials to modify tax rules to make them tax deductible. “The Dutch are also waiting for clarity but I think by the end of the year most jurisdictions will be able to issue CoCos,”said Antoine Loudenot, head of capital structuring at Societe Generale. “At the moment, I think it’s ambitious to think that Germany’s banks will be able to issue this kind of capital soon.” Instruments in all three countries are likely to feature a 5.125% Common Equity Tier 1 trigger as is stipulated by the Basel III/CRD IV requirements. Top banks are likely to have to tempt investors with 6%–8% in annual interest on the bonds, an attractive option in a world of near-zero interest rates. But this is still cheaper than issuing equity, which typically costs around 10%–12%. Plenty more Looking at the size of order books on recent deals it is clear that there is ample demand for these products. At the tail end of 2013, Societe Generale, Credit Suisse and Barclays unearthed over US$50bn equivalent worth of orders for Additional Tier 1 bonds, laying to rest any doubts about the strength of the global investor demand for these high risk securities where coupons can also be suspended. The size and strength of the global investor base for such securities had been one of the greatest sources of concern for European bank treasurers given how much needs to be issued in the coming years. “The question for the year ahead is will the European market become as deep as the US dollar sector,” said Antoine Loudenot, head of capital structuring at Societe Generale. “I think with the prospect of Fed tapering we may see more than just eurozone investors looking for European bank paper in their home currency.” According to analysts at JP Morgan, based on a peer group of 25 European banks, total issuance of Additional Tier 1 capital is likely to reach €31bn in 2014 while Citigroup’s analysts have said the overall global market for capital instruments including Additional Tier 1 and Tier 1 could grow to more that US$1trn over the coming years. “This year is going to be a busy one for bank capital,” said Peter Jurdjevic, head of balance sheet solutions at Barclays. “Certain banks may front load this kind of capital at the beginning of the year and we
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org The US investment-grade bond market is poised to experience some extraordinary changes in the year ahead, as the Federal Reserve’s withdrawal from its bond-buying programme comes into effect and as Europe starts to challenge the US as the place where corporates can get the cheapest cost of long-dated funds. Throughout 2013, the euro market saw a steady stream of US corporates choosing to issue long-dated bonds and swapping them back into dollars at a cheaper all-in cost than had they simply issued US dollar bonds at home. The trend has been growing in the past six or seven months, as the basis swap has collapsed at the intermediate and longer end of the curve. By the end of 2013, the five-year basis swap had dropped to –12bp from around –30bp at the beginning of the year, while the 10-year had gone from around –26bp to –11bp. “The cost benefits seem to manifest themselves, depending on the credit, in the seven and 10-year part of the curve and longer,” said a head of DCM at a major US bond house. “In those cases we would say the swap to dollar equivalent is better than what these kinds of sophisticated borrowers can achieve by issuing outright in dollars, and for some as much as 15bp–20bp better.” “The European market is a little bit like where the US was 12–18 months ago, when rates weren’t going higher and credit is a good place for investors to be,” said one syndicate manager in New York. “The geopolitical and policy outlook has stabilised, so the European buyer base has become much more reliable and their interest in highly rated US credits continues to be high.” A better European market also means fewer European corporates coming to the Yankee market, as experienced in 2013. Yankee financial issuance was up in 2013, at 155 deals for US$204.7bn compared with 2012’s 171 issues for US$193bn, according to Thomson Reuters data. But corporate Yankee deals were lower and dragged down the total. Yankee corporate supply dropped to 102 deals for US$146.5bn, versus 2012’s 143 issues for US$177.5bn. Yet bankers in the US might still be able to argue that the US market is much deeper than euros at the long end of the curve, with corporate pension funds and insurance companies pouring increasing amounts of money into bonds. France’s EDF attracted over US$11bn of demand for a US$4.7bn issue of senior unsecured notes from three to 100 years in maturity in the second week of January, and another US$6bn piled in the next day for its US$1.5bn offering of perpetual non-call 10-year hybrids. The demand for EDF’s bonds speaks to a new phenomenon influencing fund flow dynamics in the US market, where the US’s 100 largest corporate pension funds are reducing their equity exposure and increasing their fixed income purchases at the long end of the curve. This so-called ”reverse rotation” is being driven by funds seeking to de-risk portfolios that have for the first time in years been boosted to almost 100% fully funded status, thanks in part to a strong equity market. This demand, along with increased appetite for long-dated bonds from insurance companies attracted by higher all-in yields, has already provided a countervailing force against the negative effects of last year’s retail outflows from long-duration bond funds and ETFs. The result has been a US market that can boast of deal sizes not normally achievable at the long end of the curve in euros or sterling. EDF chose to offer relatively generous pricing for the 30 and 100-year tranches of its trade because of plans to tap the euro and sterling markets immediately after its trek to the US. But, in general, the demand for 30-year paper, while interest in the intermediate part of the curve dwindles, is helping to drive the 10s/30s credit spread differential tighter. By the end of last year, the spread between 10 and 30-year
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email email@example.com In 2013 the European high-yield market not only broke previous supply records – it obliterated them. Total euro high-yield corporate issuance was €68.7bn, according to Societe Generale, more than 60% higher than the previous record of €42.9bn in 2010. It was not just in euros either. Sterling saw a spate of issuance as well, with deals such as Virgin Media and The AA redefining what can be achieved in what used to be a niche currency. More than £12bn of high-yield bonds printed in sterling last year, compared to a 10-year annual average of just £1.5bn before this. Can the market maintain that blistering pace this year? Disintermediation pushed many European corporates into the embrace of high-yield in 2013, while yield-starved investors happily bought up everything from Greek margin debt to deeply subordinated PIK notes. Europe’s banks are on the mend, however, and if they muscle back into corporate lending, fickle companies will probably go where the debt is cheapest. The spectre of a rates rise also threatens to derail the bond market, and the hunt for yield should lessen as central banks pull back support. Yet despite these potential headwinds, market participants remain upbeat. “In terms of issuance, I think we should have a similar year to last year,” said one high-yield syndicate banker. “There’s a reasonably large maturity wall coming up that many will want to address this year, coupled with a very accommodating high-yield market where anyone and everyone are considering if they can issue. If you can get longer-term non-amortising capital at attractive rates, why wouldn’t you do it?” Analysts agree that the trends that underpinned the market last year are not going away in 2014, and generally predict that issuance will be along the same lines. Societe Generale credit strategist Suki Mann is predicting €60bn of issuance, while JP Morgan analyst Daniel Lamy pegs the figure at €75bn. Lamy does, however, think that the wave of bond redemptions will mean a drop in net issuance in 2014. Tighter and tighter While issuance has started slowly this year, market conditions are incredibly accommodative. The iTraxx Crossover, a synthetic index often used as a barometer of sentiment in the European high-yield market, is now back at pre-crisis levels. The index is hovering around the 280bp mark, levels not seen since mid-2007, and Barclays analysts predict that the index could end the year bid as tight as 245bp. This is particularly astounding as the Crossover was bid as high as 537bp in the midst of June’s taper tantrums, which triggered a sell-off across high-yield credit. Inflows also continue to underpin the market. Nearly €340m flowed into European high-yield funds in the week ended January 8, according to JP Morgan. This is the highest inflow since October and means high-yield funds have now seen 18 consecutive weeks of inflows. If these accommodative conditions are joined by a pick-up in M&A activity, then high-yield could get an even bigger boost. High-yield bonds are often a key component of leveraged buy-outs, while IPOs or sales of high-yield issuers crystallise an equity cushion for bondholders. Rising equity multiples should close the valuation gap between buyers and sellers that has hitherto stalled M&A activity, although some in the market do caution that this could have unintended consequences. “While rising equity valuations should be a good thing for M&A, it can sometimes make sponsors more inclined to wait and see if they can get a better price further down the line,” said a high-yield banker. While the sell-side remains upbeat, the corollary for the buyside is that returns are likely to suffer further. From double-digit returns in 2012, the high-yield market slipped to high single-digit returns in 2013. “Return prospects are set to worsen
To see the full digital edition of this report, please click here. To purchase printed copies or a PDF of this report, please email firstname.lastname@example.org The offshore renminbi bond market is facing an unprecedented challenge this year as Rmb209bn (US$34bn) of bonds and certificate of deposits mature in 2014, the largest refinancing wave the nascent market has yet faced. The split of maturing paper is 66% from Chinese banks, 27% from Chinese corporations and 7% from foreign issuers. Considering that around Rmb370bn of Dim Sum debt was issued in 2013 (including short-term and long-term paper) the refinancing need looks achievable. Bankers and analysts are optimistic that Dim Sum issuance will reach a new high this year, given more participants in the market and the growing offshore pool of renminbi. “For the primary market, we expect issuance of bonds and certificates of deposit to reach Rmb520–Rmb570bn in 2014,” analysts at HSBC predict. A flood of issuance from PRC financial institutions is widely anticipated, with issuance via notes and CDs from China’s banks expected to total more than Rmb150bn. The first full week of the year saw Agricultural Development Bank of China and Bank of China’s London branch seek to get a jump on the supply, with respective deals of Rmb3bn and Rmb2.5bn. Offshore branches of Chinese banks entities are frequent issuers – they contribute around 30%–40% of issuance in the Dim Sum market – but BOC London’s trade was relatively unusual in being London-targeted. It comes after similar deals from China Construction Bank and ICBC. Of the four big Chinese commercial banks only Agricultural Bank of China has not issued a London bond. Market chatter is that such a transaction will come soon, as the British and Chinese authorities seek to develop the City’s status as a major offshore renminbi centre. Chinese banks’ onshore entities have a current issuance quota for Dim Sum debt from the National Development and Reform Commission totalling Rmb75bn. Only some Rmb11.5bn of the quota has been used. State-owned enterprises, on the other hand, have yet to use any of their quota of Rmb75bn. The list of SOE issuers expected to return to the market includes CNPC, Baosteel and Sinochem. Joining SOEs are high-yield property developers which have used the Dim Sum bond market as one of their key funding sources, especially as the onshore interest yields have risen substantially and the onshore loans are hard to access. Another important issuer will be the Ministry of Finance which has Rmb12bn coming due, but is anticipated to print around Rmb20bn–Rmb30bn annually to support the development of the internationalisation of renminbi. Foreign Dim Sum issuance will be an important indicator of the extent of that internationalisation. The Chinese government and Dim Sum bond underwriters have tried hard to promote the market to global borrowers, but the keenest foreign Dim Sum issuers are those companies with operations in China. Foreign banks, for example, only make opportunistic visits when cross-currency swap rates are very favourable. With US interest rates rising and the more frequent use of renminbi in foreign trade – as well as rising swap rates – bankers hope that there will be more foreign Dim Sum issuance from banks and corporates. They are also hopeful that SSA issuers will follow in the footsteps of British Columbia which issued Dim Sum bonds last year. Nethelie Wong