Focus on corporate bonds – Investors’ appetite for benchmark bonds to reach €60bn before year-end
Investors’ demand for corporate bonds is as healthy as ever, and the ECB’s outright monetary transactions (OMT) scheme, under which the bank will buy unlimited distressed government bonds, has fuelled the appetite for corporate debt issuances in peripheral countries such as Italy and Spain.
According to a report by Credit Suisse, investors may have the capacity to absorb €60bn of new benchmark bonds over the next three months, and European companies are expected to issue considerable debt to benefit from cheap financing opportunities.
The trend will be particularly strong in peripheral Europe, where investor’s money is flowing back after the ECB announced its bond-buying programme, triggering an increase in the level of confidence in the region.
At the beginning of September, Spain’s telecom company Telefonica SA offered €750m of five-year bonds, and during the first week of the month corporates raised €16.7bn, the highest figure since March, when companies borrowed €21.4bn, according to data by Bloomberg.
Also in Spain, Banesto issued €500m in four-year covered bonds.
France Telecom also issued €500m bonds due March 2023, and other issuances have been completed by French car company Renault and Danish power group DONG.
Italy’s Intesa Sanpaolo issued a four-year senior bond, worth €1.25bn, while Italian gas infrastructure group Snam issued a two-tranche worth €2.5bn.
On September 10, Credit Suisse reported 11 fixed-rate, benchmark-sized deals priced, the highest on any single day since the inception of the euro.
“The aggregate amount issued, €10.6bn, was also the fourth highest day on record. Overall, we have seen over €26bn of new deals pricing in the first six trading sessions of September, €16bn from non-financial issuers and the remainder from financial names,” the bank said.
Even if the rush of issues is mainly based on the fall in spreads caused by the ECB’s OMT announcement, according to Credit Suisse more technical aspects are also driving investors’ appetite towards corporate bonds, as many funds have been underweight peripheral issuers.
“It seems issuers, core and peripheral, are making the most of the current benign macro conditions and insatiable demand from investors. The risks to the former are clear, with a heavy calendar of macro events still due over the coming month,” analysts said.
When this fades, however, the outlook will become more uncertain.
“Year-to-date fund returns in the investment grade world have been strong and with memories of the middle of last year still relatively fresh, we suspect indexed funds may be keen to protect their returns and stay close to benchmark allocation,” the bank said, adding that the key will be how close funds are to benchmark allocation for peripheral names.
“This is difficult to measure, but we think an obvious bellwether is the performance of recent peripheral new issues. For now, they perform strongly, and so the robust appetite for new deals should continue.”