January is ordinarily a busy time for investment bankers who make their money placing corporate bonds on the market. The start of the year traditionally sees a lot of new bond offerings. But this year, companies have been noticeably reticent on the euro bond market. In the US dollar denominated market, Belgian brewing giant Anheuser Busch Inbev caused a stir with an issue of over $46 billion, the second-biggest bond in history. But on the euro side, business has been slack.
Only about €5 billion of investment-grade bonds have been placed so far this year. Financial software company Dealogic estimates that total amounts in previous years at this stage were three times as high.
“The collapse of global stock markets, the fall in oil prices and growing volatility aren’t really conducive to companies issuing bonds,” said Ingo Nolden, HSBC’s head of primary market dealing for German corporate bonds. “When it comes to refinancing, a lot of corporate treasurers are saying: let’s hold off for a bit.”
The situation was different with Anheuser Busch Inbev. Investors had long known that the company would need lots of money to finance its takeover of competitor SAB Miller. So the bond placement was well prepared. Add to that the fact that the US market is much larger and more receptive than the euro market.
“Fundamentally, investor demand for corporate bonds is still very much there.”
Dominic Huhle summed up the overall mood: “After a weak start to the year, the mood in the markets isn’t that great, so corporate bond investors and issuers are more cautious too.” Mr. Huhle is in charge of new corporate bonds for Northern European companies at Barclays.
That said, the few new euro-denominated corporate bonds this year were well received by investors. A bond issued by car manufacturer Daimler was at the forefront. On January 5 – one of only a handful of stable days on global stock markets this year – the company issued a bond with three separate maturities, raising more than €3.25 billion. Overall investor orders exceeded €7 billion.
“Fundamentally, investor demand for corporate bonds is still very much there,” said Martin Wagenknecht, head of new corporate bonds for Société Générale in Frankfurt. Mr. Nolden, from HSBC, had a similar analysis: “As comparatively low-risk investments, bonds from solid companies will be in demand this year.” Another reason for this: since early last year, bond prices have fallen sharply, pushing up yields to more attractive levels.
On average, euro-denominated investment-grade bonds generate returns of 1.6 percent. That doesn’t sound like a lot, but it is twice the level of early last year. On top of that: “Companies are currently offering premiums of about 0.15 to 0.3 percent when they issue new bonds,” explained Mr. Nolden. That gives an extra incentive to investors.
That view is supported by investors: “We like to buy bonds in the primary market because there’s no spread between the buying and selling price, and often there’s a small premium on the bond,” said Andreas Dankel, a fund manager with the Danish company Danske Invest.
However, in the past year, investors lost an average of 1 percent on investment-grade corporate paper, according to indices developed by Bank of America Merrill Lynch. But in the coming year, banks are expecting good overall returns on corporate bonds: adding up capital gains and yields, they expect a total return of between 0.9 and 2.3 percent.
Nonetheless, it is not just business as usual in corporate refinancing. “The high volatility makes it very difficult for issuers to find the right window of opportunity for a placement,” confirmed Mr. Wagenknecht. “Weaker economic growth, worries about China, falling oil prices, and geopolitical risks are all factors which will drive volatility this year,” emphasized Mr. Huhle, the Barclays bond specialist. This all means it is a “real challenge” to find the right moment to place corporate bond issues, he added.
Issues now tend to go through a so-called “Go/No-go call.” When companies and investment banks have finished preparations on a bond placement, they hold an early-morning conference call to decide if it really is a good day to take the bonds to the market. “With the recent turbulence on the global markets, the answer has increasingly been ‘No go’,” said Mr. Nolden.
But as yet, companies on the market do not seem too worried. “Many companies have a considerable amount of liquidity onhand. They aren’t really under any pressure to turn to the bond market,” explained Mr. Huhle. In addition, there are considerably fewer mergers and acquisitions hitting the bond markets than this time last year.
Overall, bankers expect that, in spite of the weak start, roughly the same amount of euro-denominated bonds will be issued in 2016 as in 2015, a year which saw record-breaking bond issues of over €271 billion. US companies may well play a key role. Already last year, they comprised 22 percent of the market for new euro-denominated bonds. Because of lower euro zone interest rates, many American companies look to refinance in euros rather than dollars. According to bankers, British and Asian companies are also now looking to the euro market.
In the US, numerous mergers and acquisitions underlie what is expected to be a large corporate appetite for bond issuance. This should also play a role in Europe: “We expect premiums on new issues to be substantial: when companies in that situation need cash, they won’t quibble over a few basis points,” said Mr. Nolden. Investors are already looking forward to a euro-denominated bond issue from Anheuser Busch Inbev later this year, in addition to last week’s large dollar placement.
It is striking that, apart from Daimler, the biggest euro-denominated issues have all come from American companies. Food manufacturer General Mills issued €500 million in euro bonds, while the coffee and confectionary maker Mondolez raised €700. The bond issues were a hit with investors, and ended up over-subscribed.