Euro issuance across all sectors of the bond market hit a weekly record last week, breaking the previous benchmark set in late March 2020.
The heavy supply meant that many issuers had to offer healthy premiums as a sense of investor fatigue crept in.
Issuance was strong across all the main euro markets of SSA, investment-grade corporates and financials. ESG supply in the currency was also impressive, accounting for over one-fifth of total volume.
The overall tally for the week across all products in euros stood at €88.15bn, according to IFR data, surpassing the €82.63bn printed in the week beginning March 29 2020, (the week after the world's central banks stepped in with support programmes as the Covid-19 crisis began).
Bankers said the surge in issuance was due to technical reasons, as well as the time of year. January is always a busy month but some issuers are likely to have accelerated their funding plans ahead of an expected tightening in financing conditions. The US Federal Reserve, which has already started trimming its bond purchases, is now odds-on to hike the Fed Funds rate in March after the latest data showed the biggest year-on-year increase in US inflation in 40 years.
The ECB, meanwhile, will wind down its €1.85trn Pandemic Emergency Purchase Programme by March, although it will continue its separate Assets Purchase Programme.
"It just feels that every bucket in our asset class has printed," said a DCM banker. "Is that because of the tightening to come? There's probably an element of issuers accelerating."
While the SSA market usually sees some big deals in January – and did so last week with a €10bn 10-year bond offering from Spain the highlight – the corporate and financials sectors arguably stood out more. In spite of an uncertain rates outlook, credit spreads are still at relatively tight levels, encouraging issuers to spring out of the traps.
No failed deals
The financials sector recorded €23.65bn of issuance last week, which came after €13.25bn in the holiday-punctuated first week of the year. “My view on the market is very positive, considering the sheer volume of supply," said a FIG syndicate banker.
"Clearly, given the volumes, not all deals have been blowouts, but the ones you’d expect to have gone well have done. In almost all markets deals have been slower where issuers have pushed much tighter ... but none have failed, which could have been the outcome."
Italian lenders were a notable presence in the market, encompassing covered, senior preferred, Tier 2 and Additional Tier 1 transactions.
As the FIG banker noted, some bonds did not go as well others, even in the same offering. A €1.75bn dual-tranche transaction by UniCredit, for example, saw much better traction for the shorter-dated notes. The €1.25bn six-year non-call five bonds got a book of over €1.75bn but just €650m-plus came in for the €500m 10-year bullet tranche. The final concessions were around 10bp and 15bp, respectively.
It was a similar story in the investment-grade corporate market, with the main themes being heavy supply, some generous premiums and shorter-dated tranches appealing more than longer. Overall, there was €20.1bn of corporate issuance after including some EM crossover credits.
"It's one of the top 10 busiest weeks of all time," said a second DCM banker. "The pipeline included some transactions that were held back towards the end of last year as a result of increased market volatility."
Sustainability-linked and green bond supply was particularly notable last week. Investment-grade corporates raised €9.45bn in ESG format, including SLB debuts for Italian gas company Snam and CEE real estate owner CPI Property.
The overall supply certainly impacted pricing. Several deals had to offer generous concessions over fair value, particularly those that had more than one tranche on offer. One pattern that emerged was issuers having to pay much bigger concessions for tenors of seven years or longer compared with the short end, as rates have moved higher.
German property company LEG Immobilien, for example, sold a €500m four-year tranche inside fair value but with 12bp–13bp concessions for its €500m of seven and €500m of 12-year notes. Even E.ON, one of the most tightly traded utilities, had to pay a premium of at least 10bp for the longer tenor in its €1.3bn dual-tranche offering, compared with just 3bp for the shorter bond. A €500m four-year note tranche was priced at mid-swaps plus 23bp and a €800m long 12-year green portion at plus 52bp.
Now, with earnings blackouts around the corner, supply is expected to tail off, which should allow investors to digest the new paper and support spreads.
The US dollar high-grade market has also got off to an impressive start to 2022, with issuance for the year crossing the US$100bn mark on Wednesday.
Additional reporting by Tom Revell and Jihye Hwang