Europe’s corporate-bond market is bracing itself for an extended dry spell.
From Tokyo to New York, the U.K.’s decision to quit the European Union triggered the kind risk aversion that tends to send corporate borrowers onto the sidelines as investors demand bigger yield premiums.
More than a third of market participants surveyed by Bloomberg see zero issuance next week, which would be a first for the year. And 81 percent said sales, including sovereign notes, could total less than 5 billion euros ($5.6 billion). For the region’s least-creditworthy borrowers, issuance may be paralyzed for the next two months, said Olivier Becker, a Paris-based fund manager at Oddo Meriten Asset Management SA.
“There are never new high-yield issues when the market is volatile like this — never,” said Becker said on Friday. “I don’t expect new issues to come back until September.”
Even before the Brexit vote, sales in Europe had been in a funk. Euro issuance this week was the lowest since February. The year-to-date total is also down 7 percent, even after the European Central Bank’s stimulus program pushed borrowing costs toward record lows.
ABN Amro Group NV and UniCredit SpA say that even sales of investment-grade bonds — which have been bolstered recently by ECB purchases in the secondary markets — are likely to be stifled until the middle of next month.
The “leave” camp’s win in the U.K. referendum rattled markets as investors worried about the potential for wider political instability and an economic slowdown. The Bank of England and International Monetary Fund both said before the vote that a Brexit could disrupt trade and economic growth in the U.K. and the rest of Europe.
“We will probably see no issuance for a few weeks, until there is some stability,” said Andrew Wilmont, head of European high-yield investment at Neuberger Berman, which oversees about $257 billion. “Investments are going to be on hold.”
Germany-based Adler Real Estate AG postponed a sale of convertible bonds last week citing investor uncertainty caused by the U.K. referendum. Brown-Forman Corp., the maker of Jack Daniel’s whiskey, met investors earlier this week to discuss a potential bond sale in sterling, euros or both.
The Louisville, Kentucky-based distiller didn’t immediate reply to an e-mail and phone call outside office hours on Friday seeking comment on whether the sale will go ahead.
Low-Cost Borrowing
Corporate issuance may pick up in the weeks ahead because of low borrowing costs in euros, said Gianluca Minieri, the global head of trading at Pioneer Investments, which has 219 billion euros of assets under management. The average yield on investment-grade bonds in the single currency is less than 1 percent, based on Bank of America Merrill Lynch index data.
“Companies still have good opportunities to raise capital at an attractive level,” Dublin-based Minieri said. Still, they may “assume a wait-and-see approach” until markets calm down.
The Markit iTraxx Europe index of credit-default swaps on investment-grade companies surged the most in almost eight years on Friday. A gauge of swaps on sub-investment grade companies jumped by the most since October 2014.
U.S. Impact
In the U.S., the risk premium on the Markit CDX High Yield Index jumped 37 basis points to 459 basis points. That’s the biggest move since December. A similar measure for bonds of investment-grade companies climbed 10 basis points to 87 basis points, the most since October.
“Right now, you can’t do anything,” said Michael Shapiro, who helps run debt capital markets for the Americas at Societe Generale SA. “We’re doing as much research as we can to gather information to better educate our clients about the impacts this could have.”
Companies have raised 185 billion euros in bond sales this year, according to data compiled by Bloomberg. Luxury-goods maker Christian Dior SE was the only non-financial issuer to sell notes in the single currency this week, raising 350 million euros. The bonds yielded less than 0.8 percent.
“For one or two weeks, it is likely that there will be no issuance,” said Christian Reusch, co-head of global syndicate at UniCredit. “We have to digest the news — a lot of people didn’t expect this outcome.”
SOURCE: Bloomberg
