DCM fees in the first quarter fell 21%, earning banks US$5.1bn. Thomson Reuters data showed an 11% drop in high-yield volumes and a pull-back from US corporates, two of the most lucrative areas.
Global investment-grade corporate debt volumes fell to US$738.5bn versus US$772bn for the same period last year.
Chris Whitman, head of global risk syndicate at Deutsche Bank, said the drop in fees could be partly attributed to the first quarter of 2013 being a record quarter, setting a high water mark for fees.
Another factor is the negative news and market volatility that has marred 20014 almost from the start. Investors were rattled by a sell-off in emerging markets at the end of January, while Russia’s actions in Crimea also unsettled markets.
Emerging market debt issuance remained robust, but was dominated by sovereigns who typically pay paltry fees.
If the first three months were a disappointment, the coming months could make up for that.
Jonathan Brown, head of fixed income syndicate at Barclays, said he expects high-yield to pick up after a disappointing quarter.
“There is a lot of visible pipeline and things should look better in Q2,” Brown said
High-yield issuers should be encouraged by the fact that average coupons continue to drop, to just 6.46% in the first quarter, down 65bp versus the previous quarter and far lower than the 12% seen at the end of 2008/early 2009.
“Although the easy money in credit has been made, I still expect spreads to be able to grind tighter and for credit to continue to outperform rates,” said Whitman.
He pointed to areas such as Additional Tier 1 or corporate hybrids, where there was still potential for excess gains, which in turn will drive total returns.
Strong returns will spur more investor inflows and, in turn, support incremental issuance. This could help banks’ revenues as fees for hybrids tend to be higher than those paid for arranging senior fundraising.
This was undoubtedly one of the big trends of the first quarter, with issuance of Additional Tier 1 debt by European banks reaching €9.54bn-equivalent versus zero in the first quarter of 2013.
According to Thomson Reuters data, financials volumes are up 5% versus Q1 of last year at US$462.6bn, and some 31% higher than 2013’s fourth quarter.
Banks are expected to continue to issue Additional Tier 1 debt as issuing costs plummet and more borrowers get the go-ahead from their regulators and sign-off from their tax authorities.
Hybrid corporate issuance has hit over €10bn already this year, eclipsing 2012’s full-year level and outpacing 2013’s first quarter of €8bn, and well on track to hit the €25bn-plus raised in the whole of 2013.
“The European corporate hybrid market remains vibrant and has now developed into a diverse asset class for investors,” said Brown.
“It’s viewed as an established and essential part of an issuer’s toolkit,” said Brown.
That toolkit has been well utilised by European companies, contributing to the overall increase of European non-financial issuance, which was up 15% at US$373.9bn versus the same period last year, and beating their US counterparts who issued US$265.1bn, down 10% versus Q1 of 2013.
Another shift in corporate financing patterns was driven by strong investor demand, with corporate and financial issuers issuing floating rate notes at the highest rate since the second quarter of 2008. Thomson Reuters data shows that FRN issuance is up 39% versus Q1 of 2013 at US$155.7bn.
Despite the mixed first quarter, bankers are sanguine about the near-term future.
“I am optimistic about the second quarter and expect to see a larger number of deals driven by acquisition financing and strategic borrowing,” said Whitman.