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M&A, US surge to drive corporate bond market in 2015
[LONDON] M&A-related financing and a US borrower surge will be the biggest drivers in next year's European corporate investment grade market, syndicate officials say.
Euro-denominated issuance in the sector this year totals 234.5 billion, up almost 25 billion from 2013, according to Thomson Reuters data. And while many market players expect issuance in 2015 to be roughly the same as this year's bumper volume, cross-border and M&A influences could boost it further still.
In turn, M&A-related financing is expected to spur more hybrid issuance beyond the near 20 billion sold this year. One syndicate official said a recent flurry of five hybrids in the last month - four of them for M&A purposes - has proven the market's ability to digest regular supply. "There was a concern that investors might push back, but all of the recent deals have done relatively well. The acceptance of the sector from company CEOs has also helped drive new issues, and this will be reflected across different sectors next year,"the banker said.
Market players are also expecting the asset class to perform strongly independently of M&A-related issuance, given that 2015 is a significant year for redemptions. "The market has shown appetite for hybrids from an increasingly broad range of sectors, such as trades from Volvo, Accor and Arytza. We would not be surprised if 2015 volumes surpass this year as the product has become much more mainstream," Mark Lynagh, head of European corporate DCM at BNP Paribas said.
A research note by JP Morgan said that after an Alliander perp was tendered for in November 2013, there are 11 other hybrids totalling 9.3bn-equivalent that can be redeemed during 2015. "We expect most of these instruments will be called and replaced. Within the utilities sector the only issuer that we don't think will call its hybrid is Suez Environnement; the company tendered for 300m of the notes in June at 104¬. The other likely outlier, in our view, is Suedzucker," the JP Morgan note said.
Europe beckons Another hot topic is US corporates, which many syndicate officials say will hit the European market in bigger droves in 2015.
Those expected in Europe next year will be a mixture of sophisticated and debut borrowers looking to take advantage of stronger technicals to diversify their funding overseas. November's market activity hinted at how things could shape up next year. Companies such as Apple, AT&T and Verizon sold jumbo euro deals, while the more niche names of Thermo Fisher and Albermarle also dipped their toes into European waters.
In all, US corporates have raised almost 37 billion in euro-denominated debt in 2014 - nearly 50 per cent higher than the 25 billion euros sold in 2013 and more than 66 per cent up on the 22 billion priced in 2012.
But that 37bn total is small fry compared to the US$444 billion that US corporate non-financial issuers have priced in their domestic market over the same period, giving a taste of what could come in Europe.
As part of the cross-border emergence, the European corporate market could also see increased issuance from emerging market companies reaching for investor diversification and low coupons, particularly from Mexico, Chile, Brazil and Asia, a syndicate official said. "We'll see more issuance from emerging market countries and names that the market feels comfortable with. It may not be a big part of the pie but it will be there next year," another syndicate official said.
Tighter into 2015 Another factor weighing on the market's mind is whether the ECB will expand its asset buying programme into corporate bonds. JP Morgan says it expects the ECB to announce corporate bond purchases in the first half of 2015, where it could buy 50 billion euros a year of benchmark-sized senior investment grade non-financial paper from European issuers.
"We expect this to cause 15bp of tightening in investment grade credit, giving us a 2015 spread forecast of 67bp from 82bp currently. This corresponds to total returns of 0.93 per cent." One syndicate official said that would also see investors buying longer duration bonds in a search for higher yields, resulting in more flexibility and depth in the corporate market. "A few years ago some corporates were pushed towards capital markets given bank liquidity constraints - although liquidity is plentiful these days, corporates are attracted to the bond market by low, long term funding rates and increased investor diversification," BNPP's Mr Lynagh said. "On balance the outlook for IG corporate funding costs is positive - if the ECB embarks on QE this is likely to result in tighter spreads, whether corporate bonds are directly targeted or not." However, some investors and bankers fear that central bank purchases will throttle liquidity and cause price distortions.
There are also concerns that the corporate market would see a repeat of what has happened in the primary covered bond sector, where after an initial flurry of heavily oversubscribed deals, books dwindled as real money investors looked elsewhere for yield.