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Europe's borrowers brace for death of easy money


BANKERS and borrowers are bracing themselves for a difficult year selling eurobonds now that the days of easy money are coming to an end.

January is often the busiest month of the year for new bond sales but as credit markets lose their biggest backer and political threats loom - Brexit, Italian fiscal angst and trade woes - companies must wise up to 2019's primary market challenges. In vogue: opportunism, front-loaded issuance and higher borrowing costs.

"The year as a whole will be window driven, but many will try to access the market in January," said Duane Elgey, a debt syndicate director at Societe Generale SA. "Once it is accepted that spreads are not returning to early 2018 levels there will be a number of deals coming back to market." That's a picture similar to the last weeks of 2018 as financial conditions have worsened and borrowing costs increased as credit investors react to rising US rates and the end of the European Central Bank's stimulus programme.

"What we have experienced for the first time in many years is if it's a bad market, it means there is execution risk, people are acutely aware of that and want to avoid that type of market," said Frazer Ross, Deutsche Bank AG's head of EMEA investment-grade credit bond syndicate. January could be "very hit and miss" and a lack of jumbo merger and acquisition activity could also stymie sales, he said.

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German car parts maker ZF Friedrichshafen AG and payment process Ingenico Group both postponed deals in the past couple of months citing market conditions. Chocolate maker Barry Callebaut AG and US-based Emerson Electric Co are both yet to offer bonds even though they had met with investors for potential deals.

Sales of new bonds dropped about 18 per cent to 227 billion euros (S$353 billion) in 2018, according to data compiled by Bloomberg, with SAP SE on Dec 3 selling probably the last corporate deal of the year. Closure of the market in December may mean there are more borrowers now on the sidelines and looking to sell bonds next month.

January issuers could be the first in more than two years to miss out on the ECB's Corporate Sector Purchase Programme, as the central bank will end 2.6 trillion euros of quantitative easing at the end of the year. That tally included buying nearly 180 billion euros of corporate bonds in primary and secondary markets.

The central bank is set to reinvest asset proceeds as they mature, although it's not yet clear if that will include new bonds, or stick to only buying in the secondary market. Bonds maturing next month include securities from BMW Finance NV, BASF SE and Orange SA. BMW has often been one of the first issuers in the market each January.

Getting in early may help issuers avoid volatility around looming risks, such as the UK's March 29 exit from the European Union. This list of geopolitical dangers could also easily scupper even modest expectations for primary sales next year.

"The biggest concern is a lack of resolution," said Mariano Goldfischer, global head of syndicate at Credit Agricole CIB. "You can analyse company fundamentals but the uncertainty of the political landscape could derail everything." BLOOMBERG

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