UK businesses see sterling alternative as euro corporate paper continues to fly high
Having shown remarkable resilience in the face of last year’s geo-political turbulence, and with investor demand bolstered by continued ECB appetite, the euro corporate bond market presents a compelling option for UK businesses looking to raise funds, says David Vials, head of corporate coverage, UK & Ireland, at UniCredit.
Would-be issuers must, however, avoid complacency and ensure careful observation of pricing, timing and investor approach.
Boosted by the tailwind of the European Central Bank (ECB)’s Corporate Sector Purchase Programme (CSPP), the euro corporate bond market represents an excellent opportunity for UK businesses to raise capital. The huge demand for euro-denominated paper, combined with the market’s sophistication and maturity, has made it increasingly attractive to UK issuers – contributing to significant momentum away from sterling issuances in recent years.
Indeed, while over 40% of outstanding bonds issued by companies incorporated in the UK are denominated in sterling, recent issuances have moved away from the pound, which accounts for just 25% of UK corporate bonds issued in 2017. Competition from the euro market has certainly played its part. Despite a period of macroeconomic instability and geo-political uncertainty in 2016 and early 2017, conditions for euro bond issuers have remained highly favourable – to the point where complacency may in fact be the foremost obstacle to a successful euro bond launch. Opportunities abound, however, for those issuers that can retain a tight focus on pricing, timing and investor approach.
Negative rates and ECB money fuelling demand
Of course, conditions in the sterling bond market have improved in recent months, with so-called “pound tourists” – foreign investors looking to profit from the depreciation of the pound – boosting demand for sterling-denominated debt. Yet the euro bond market remains the more compelling option – offering a more mature, liquid market underpinned by the expectations of continued corporate-bond buying from the ECB, even as it looks to taper its asset purchasing programme. This influx of cash into the market, combined with negative Euribor and mid-swap rates – which are compelling euro investors to commit money now, rather than leave it idle in an account – has led to huge levels of demand for euro-denominated corporate paper.
Such is the strength of these combined forces that issuers – and not just those of investment grade – are finding their order books oversubscribed many times over. A EUR 600 mn 8 year offering from UK based Anglo American Capital plc, for instance, found itself more than five times oversubscribed in September, collecting orders from more than 300 accounts.
What’s more, the euro bond market has remained resilient in the face of significant geo-political upheaval in recent years – with a string of consecutive disturbances having minimal effect on activity. Both the UK’s vote to withdraw from the European Union (EU) and the election of Donald Trump in the US received considerable media coverage, yet the immediate detrimental effect on Europe’s corporate bond market was relatively small and short-lived.
That said, corporates cannot safely assume that conditions will remain generous forever. Prospective issuers will have to remain watchful of upcoming events, planning any activity carefully to avoid being caught unaware by a sudden shift in the market.
Yet predicting the twists and turns has been particularly difficult of late. Before the first round of the French election in April, for example, a large number of investors shorted the French market in anticipation of an unfavourable result. These investors lost out when the market rallied strongly in response to the results, which were more positive for the market than expected.
Eventually, however, an event will take place that does cause the market to contract – and bond issuers will want to ensure they are aware of all possibilities when timing their launch.
Ensuring a successful issuance
Indeed, timing is one of the critical determinants of success in a given bond issue. The aim must always be to issue bonds when your debt is in particular demand. Few, for instance, would have advised a sterling issue in early 2016, when the market stalled amid growing uncertainty around the UK’s vote to leave the EU.
Equally important, however, is pricing. Issuers need to ensure their bond is priced so as to fall within investors’ strict parameters for risk, cost and return. An excellent understanding of the market is crucial for issuers to find a price point that not only meets the specifications of investors, but also addresses their own capital needs and ability to repay.
Finally, issuers must approach the right investors – and do so in the right way. Strong relationships with key investors are, of course, essential, but investors of all sizes have the potential to be valuable partners – particularly when market activity drops. Understanding the preferences and priorities of a comprehensive range of investors can therefore make all the difference.
Bringing these three elements together is no easy matter. It requires knowledge, expertise and tailored research – all of which are best sourced from an expert banking partner. Certainly, at UniCredit, we find clients come to us for support with these challenges all the time.
And it makes sense. Issuing corporates need a partner that can call on long-held ties with a wide range of investors – something banks often have from their existing commercial relationships. UniCredit, for instance, has built relationships with investors across Italy, Germany and Central and Eastern Europe through its credit research platform. Banks with this kind of relationship not only know and understand investors, but, as investment advisors, their word also carries weight.
Banks’ experience – and often extensive track records of execution – with corporate bonds should also not be discounted. It is this that means they can be relied upon to provide a trustworthy read of the market. Diversity of experience is critical here – fostering an understanding of the subtler market movements and how to tailor issues to highly specific briefs.
Support of this kind will be invaluable for corporates looking to capitalise on the positive market conditions. And while, as we have already noted, the future is difficult to predict, the euro bond market looks set to be a compelling capital-raising option for some time yet. Even after the CSPP has been phased out, investor appetite for euro corporate debt is likely to stay strong – upheld by the persistence of negative Euribor and mid-swap rates. Whether now or in the near future, the opportunity is there for UK corporates to accumulate funds in highly favourable conditions.