Friday 28 April 2017

International events and EU failings conspire to push up borrowing costs

The Libyan crises, the latest in a series of Arab conflicts has caused market instability
The Libyan crises, the latest in a series of Arab conflicts has caused market instability

Ben Martin and Esteban Duarte

COMPANIES are selling the fewest bonds in euros since 2008 as the failure of European politicians to resolve the debt crisis, military intervention in Libya and Japan's unfolding nuclear disaster push up borrowing costs.

Investment-grade borrowers sold €123bn of bonds this year, down from €191bn in the same period of 2010, with companies from Europe's most indebted nations bearing the brunt, according to data compiled by Bloomberg. Bond yields relative to government debt ended an eight-week rally this month.

Japan's earthquake and its aftermath are adding to concerns that political instability in the Gulf will hurt the economic recovery and Portugal will be forced to follow Greece and Ireland in accepting international bailouts.

Banks are also being forced onto the sidelines of the euro debt market, issuing 36pc less unsecured notes than a year ago and relying instead on safer, so-called covered bonds.

"It seems every day you come into the office there's a new crisis," said Gary Jenkins, head of fixed-income at Evolution Securities in London. "How are you supposed to price risk in such an environment? It's very difficult, and therefore it's a tough environment to be an issuer."

Companies and banks in Spain, Portugal, Italy, Greece and Ireland raised €26.6bn from bond sales in the common currency this year, Bloomberg data show. That's a 40pc drop from the €44.6bn of debt sold in the same period last year and bigger than the 36pc decline in the broader euro bond market.

The extra yield that investors demand to hold euro-denominated bonds, sold by companies and banks around the world instead of benchmark government debt, has risen 7pc since reaching a four-month low on March 4, according to Bank of America Merrill Lynch indexes. For Irish borrowers, the jump in relative yields was 11pc, while for companies in Spain, Italy and Portugal the increase was from about 2pc to 5pc.

Globally, banks sold €90.2bn of bonds in the European currency this year, down from €141.6bn in the same period of 2010. By contrast sales of covered bonds -- notes pioneered in 18th-century Prussia that typically get the highest ratings because they're backed by mortgages or public-sector loans and guaranteed by the issuer -- rose 40pc to €99.3bn.

"Most investment banks expected a decrease in corporate bond issuance this year, but it's fair to say that the markets have been even quieter than anyone could have possibly imagined," said Marco Baldini, head of European corporate bond syndication at Barclays Capital in London.

Part of the slowdown in sales is because many non-financial companies borrowed enough in 2009, a record year for debt issuance after the credit crisis and before the latest problems struck.

Borrowers raised a record €936.8bn from bond sales in the common currency in the whole of that year, about double what they're on pace to issue in 2011. Some debt coming due this year is already "pre-funded", said Mr Baldini.

Many European issuers are cash-rich, with total cash holdings at 466 companies in the region at $691bn as of the end of September, or 16pc higher than at the end of 2007, the year the financial crisis began, Bloomberg data show.

Sales have been also stunted as European leaders struggle to tackle a deficit crisis that broke out in late 2009.

Portugal may be next to ask for aid after Moody's cut its credit rating on March 15, citing "subdued growth prospects".

The debt crisis, events in Japan and the Middle East protests that most recently led to fighting in Libya are "critical factors that could influence 2011 revenues and future investments, and when companies need funding again and return to the bond market", said Matthias Glueckert, global head of debt syndicate at UniCredit SpA in Munich.

The scarcity of new bonds does mean those companies willing to pay up have been able to borrow. Terna SpA, Italy's national power-grid operator, issued €1.25bn of securities this month, while SES, the world's largest publicly traded satellite operator, raised €650m.

French utility GDF Suez sold €300m of 100-year bonds on March 9, the longest-dated issue of senior, unsecured debt in the European currency by a corporate borrower.

"The culmination of events over the past couple of weeks has obviously been major," said Huw Richards, JPMorgan Chase's head of high-grade capital markets for western Europe. "We're on flashing yellow versus the bright green we had at the beginning of the year, but underlying issuance is certainly there to get done." (Bloomberg)

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