Issuance in the euro market shows no signs of slowing despite a significant widening in key indices in the past month. Borrowers across all sectors are hitting the screens, with the investment-grade corporate market especially busy ahead of an expansion of the ECB's purchase programme next month.
This week, total issuance in the euro market, including corporates, financials and SSA borrowers, is a little more than 26bn, which followed just over 31bn last week. The flurry in deal flow comes in spite of a worsening in leading risk indicators, such as the iTraxx Crossover. The index was quoted at 335bp on Thursday, 45bp wider since April 21, although still well inside the near 500bp level it hit mid-February.
That violent move, allied with fears in other markets, derailed issuance in the first quarter. But a better technical backdrop, underpinned by the ECB's more aggressive QE plan, is overriding any macroeconomic concerns. "There's a new buyer in town who doesn't trade the Crossover," said one syndicate banker in reference to the ECB's decision to buy corporate bonds from June as it increases its monthly bond purchases to 80bn from 60bn.
Other indices are also wider over the past month, though to a much lesser degree. The iTraxx Main, which measures investment-grade credit risk, is 10bp higher. Cash spreads have performed better, with investment-grade corporates 4bp wider over the same period, according to iBoxx index data. "Credit spreads have widened out," said William Weaver, head of debt capital markets, EMEA, at Citigroup. "The Crossover is meaningfully wider. But deals are getting done and new issue premiums are mostly low."
A syndicate banker covering the investment-grade market said: "Things have definitely been softer, but right now we're telling clients: 'look, forget about the indices and the market looking weaker, just get the deal done'". "People want investment-grade corporate paper so sell it while it's hot and while deals in the aftermarket are performing OK. It's best to capitalise now and not wait around."
FRENZIED While issuance this week hasn't been quite as frenzied as last week, there's still been plenty of activity in both the investment-grade and high-yield sectors. The reverse Yankee theme continued with transactions by Nasdaq and Eastman Chemical as US corporates lock in attractive funding costs. But more notable were high-beta trades from the likes of Telecom Italia and Holcim. The Italian company, a fallen angel, sold a 1bn 10-year at 3.625% off a 4bn book. That allowed it to tighten pricing from an initial high 3% to 4% range.
Construction company Holcim, meanwhile, raised 2bn through seven and 12-year notes. That deal, however, showed that perhaps for the first time since the deal flow really picked up in the second quarter, investors are beginning to push back on certain transactions. Not only did the company have to pay a decent concession - 25bp in the case of the 12-year - but it dropped a planned 20-year tranche. French media company Vivendi also had to offer a juicy premium to raise 1.5bn through a five- and 10-year offering. It paid a 20-30bp concession, according to a banker away from the deal.
CONSERVATIVE In high-yield, one banker said issuers will have to adopt a more conservative approach, which was reflective of a weaker market for Double-B credits. French manufacturer Nexans priced a 250m five-year at 3.25% having pulled the deal a year ago when leads at the time were whispering it with a two handle.
"Crossover names have been soft recently - if you look at HeidelbergCement's recent bond, it's off 30bp over the past two weeks," said the banker. "It looks like the perfect window was the end of April and anyone coming now will have to pay up. Relatively speaking, of course - levels are still tight." Still, while bankers are aware that a big sell-off could be around the corner, most remain optimistic about the pipeline for the next few weeks, pointing to continued inflows into bond funds.
High-grade bond funds have seen 10 weeks of consecutive inflows, with US $12bn of money coming in since early March, according to EPFR. And while high-yield funds have started to see negative flows, overall the asset class has seen inflows of US $1bn over the same period. In contrast, equity funds have seen 15 consecutive weeks of outflows.