It’s been a dramatic start to the year for global corporate bond markets. Companies borrowed more money than in any other January on record.
Bullish sentiment has encouraged investors to lend despite slender returns. But the strength on the issuer side is driven not only by the low cost of debt, but by fear that it may never be this good again.
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This comes as markets are abuzz with talk of a bubble in credit, with even the most bullish investors starting to say the straightforward rally in credit that has been lifting the entire asset class may be petering out.
Companies were able to issue more than $180bn worth of debt in the past four weeks, according to Dealogic, up 25 per cent from the same month last year. Every week a new deal was done that made market watchers bristle with excitement.
Earlier this week came the largest Greek corporate bond since the sovereign debt crisis began with a €700m issue from OTE, the Greek telecoms company, as strong demand spilled into even the more beleaguered regions of the world.
In France EDF, the state-owned utility, launched a hybrid bond – which falls in the very riskiest part of the capital structure – for €6.2bn.
This was the largest such deal on record by nearly four times and was heralded as a breakthrough moment for the asset class.
In the US, where nearly $60bn worth of deals made it the best start to a year ever, Tenet Healthcare and Denbury Resources issued a combined $2bn worth of “junk” bonds below the 5 per cent threshold, establishing record low coupon levels for five-year and above bonds.
“Volumes are running at a record pace,” says Mathew Cestar, head of leveraged finance in Emea at Credit Suisse. “Investors have, globally, taken up large quantities of paper, reflecting an improvement in market sentiment.”
But January may prove to be the exception in 2013.
This is because it is fear of a market turnround that is persuading many corporates to issue debt early, suggesting the rest of the year could be less buoyant.
Analysts say many companies will simply have completed their funding requirements.
“We still believe we will see overall issuance of investment grade debt fall by 10-15 per cent this year,” says Nigel Cree, head of syndicate desk Americas at Deutsche Bank. “The manic pace of the first three weeks of the year is likely to slow down.”
Ed Marrinan, head of macro credit strategy at RBS Securities, adds: “We do feel this is a quick start which will ultimately slow down. Corporate paper should be down as a result of so much pre-funding last year.”
The fear is due partly to worries about volatility. Analysts at RBS say that, in Europe, there could be a 10-15 per cent spread widening from current levels as the Italian elections, Spanish budget numbers and fiscal cliff negotiations shake markets off their record high levels in the short term.
“Credit investors have been fed a large diet of new corporate issuance over the last months. Now we think they are starting to get indigestion and will take pause,” says Lee Tyrrell-Hendry, macro credit analyst at RBS.
“The economic outlook remains uncertain,” adds Morven Jones, head of corporate debt capital markets for Europe at Nomura. “Against this backdrop, issuers are understandably looking at where rates are and locking in a low cost of capital.”
There are also concerns that in some parts of the market, there could be a more substantial reversal in prices further down the line, leading to higher borrowing costs. Even an indication of inflation returning or central banks being less accommodating could be catastrophic for longer dated bonds, for example.
Bond prices have already started to fall in recent weeks after months of strong gains that pushed yields to all-time record lows. Most view this as a small correction, but with yields at such low levels corporate treasurers take the view it might be wise to tap the market sooner rather than later.
There is also a sense that prices are unlikey to rise at the same rate in 2013 as they did following central bank action in Europe and the US late last summer.
“We think the kind of broad based rally we saw last year is unlikely to happen again,” says Nick Gartside, chief investment officer for international fixed income at JPMorgan Asset Management. “Value will be far more deal specific.”
Matthew Craston, head of alternative investments at asset manager ECM, says: “Spreads can tighten further, but I do not think anyone feels we can have anything approaching the kind of year we had last year.”
Also driving a slowdown in issuance through the rest of the year would be weak mergers and acquisitions activity globally, which limits the need for new funding and leaves companies just refinancing the existing debt.
“Companies do not need to issue if they do not have a good use for the cash,” says Brendon Morgan, global co-head of corporate origination at Société Générale.