(Bloomberg) — Europe’s high-grade bond markets are in for a brisk start to 2022 as companies rush to replenish dwindling pandemic cash piles before an inflation surge pushes borrowing costs higher.
The changing outlook is pitching borrowers into a new scenario that’s very different to that seen during much of the past two years when almost every corner of credit rallied on the back of unprecedented support from central banks and governments.
That may encourage firms to make an early start tapping the markets in 2022 to lock in cheaper funding before credit spreads widen further, said Marco Baldini, head of European bond syndicate at Barclays Plc.
“Assuming market conditions are good, then I think a lot of people are going to carry on and fund ahead of further instability that could remain around the inflation topic as we move into next year,” he said in an interview. He thinks January will already be busier than usual after some borrowers delayed their end-of-year financing plans to assess the impact on markets of the new omicron coronavirus variant.
Despite the prevailing low borrowing costs, European investment-grade corporate debt supply dipped by more than a third this year compared with 2020 to 260 billion euros ($293 billion), according to data compiled by Bloomberg.
That’s because many companies had already built up large cash reserves during the acute first phase of the pandemic, Zoso Davies and Jenny Avdoi, credit strategists at Barclays, wrote in a note last month.
Drying Up
Some borrowers may need to rebuild their cash buffers even as demand for bonds becomes more vulnerable to concerns about the liquidity drain that could come as central banks pare back stimulus, BNP Paribas SA strategists, including Viktor Hjort and Stephen Caprio, wrote in a note.
“The theme of normalization in monetary policy is going to be dominant in 2022,” said Paula Weisshuber, head of EMEA corporate debt capital markets at Bank of America Corp. “Corporate bond markets are going to get back some of their old flavors: wider trading ranges, potentially wider spreads and higher volatility as central bank support will no longer keep as much of a lid on credit spreads.”
Even so, there are more reasons why issuance could gather momentum next year, even with financing conditions set to get costlier and a need for firms to be more nimble.
Societe Generale SA’s strategists Guy Stear and Juan Valencia see high-grade borrowings bouncing back next year to 330 billion euros. Activity of that order would make 2022 the third-best year for investment-grade supply on record, they wrote.
A big chunk could come from telecommunications firms, which face about 17 billion euros of redemptions and are still spending freely on expanding fiber networks and infrastructure, according to BNP Paribas strategists.
More Mergers
Meanwhile, the prospect of more merger and acquisition activity “means more funding,” as well as supply of hybrid debt, a type of security that combines features of equity, said Marc Baigneres, head of Western Europe, Japan & Australia investment-grade finance at JPMorgan Chase & Co.
Another driver of supply could come from U.S. issuers selling debt in euros with European Central Bank interest rates expected to remain lower for longer than those set by the Federal Reserve, said Barclays’ Baldini.
HSBC Holdings Plc’s James Cunniffe, director for corporate syndicate, agrees. “We shall continue to see the euro currency as an attractive market for many returning issuers, along with those coming to the euro market for the very first time,” he said. “U.S. names will no doubt remain dominant, but we shall also see international names look to secure low coupons from other regions as well.”
For Bank of America’s Weisshuber, appetite for environmental, social and governance debt will keep growing. Ethical issuance reached 44% of Europe’s marketwide bond deals in November, the highest monthly share this year, according to data compiled by Bloomberg.
“There are still a lot of issuers who have not yet tapped the market and are closely considering which format they should choose,” she said.
Elsewhere in credit markets:
EMEA
European high-grade companies are increasingly linking their primary credit facilities to environmental, social and governance objectives as businesses come under pressure to disclose their sustainability credentials.
- European credit is set to get pummeled by rising yields in 2022, Bloomberg Intelligence strategists write. Bund yields are on the way to becoming positive, forcing very negative total returns for high grade, as the carry is miniscule
- Twenty central banks including the U.S. Federal Reserve, European Central Bank, Bank of Japan and Bank of England are all meeting this week, as investors assess the resilience of the reopening against the advance of the omicron virus variant
- The gatherings will emphasize a division in stance, as some plan to turn to tackling surging inflation while others keep stoking demand — a split that looks set to widen in 2022
- Read also: The Central Bank Roadmap Is Getting Redrawn: Marcus Ashworth
- The gatherings will emphasize a division in stance, as some plan to turn to tackling surging inflation while others keep stoking demand — a split that looks set to widen in 2022
Asia
A rally in Asian high-grade and junk dollar debt risked unraveling Monday as concerns about developer Shimao Group Holdings Ltd. overshadowed recent Chinese policy moves that had spurred gains.
- Shimao’s dollar bonds dropped as much as 10 cents on the dollar in Hong Kong, according to credit traders, signaling mounting concern about the firm’s ability to service its debts
- Spreads on Asian investment-grade notes, which had tightened by their most in more than a year last week, were little changed Monday, while prices for Chinese junk debt in the U.S. currency dropped two cents
- Meanwhile, China Construction Bank Corp./Macau is the sole company marketing a deal in the region’s primary bond market
- The equanimity in financial markets that greeted the defaults of China Evergrande Group and Kaisa Group Holdings Ltd. might suggest the crisis in China’s property market is over. Far from it
- Read also: Weak Confidence in China Developers Spreads to Commodities Debt
Americas
The end-of-year lull for U.S. corporate debt markets appears to have finally arrived after high-grade companies set a December issuance record in just the first two weeks of the month.
- Wall Street expects a slowdown to just $5 billion in sales for the week, according to an informal survey of debt underwriters. Several dealers have said that most of the December new debt calendar has been wrapped up, and they anticipate a slow drip for the rest of the year
- Foreign buyers stepped into the U.S. investment grade corporate bond market when Treasury yields moved higher, according to strategists at JPMorgan Chase & Co., and they could help spreads tighten into year-end
- In leveraged loans, companies have begun to ease up on announcing new deals as the end of the year approaches, but there are at least three dozen deals on the calendar that are expected to price over the next few weeks
(Adds regional credit market sections)
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