Successful Eurobond Issuance in 2008
By Mark Dodd, Managing Director, Co Head of Global Corporate Syndicateand Tim Muehlenbach, Director, Debt Markets Group, European Corporate Origination, RBS
One of the most significant outcomes of the credit crisis is, without doubt, the change in investors’ influence, and in particular, the type of investors which now hold most sway over the bond markets. So-called ‘real money’ investors, such as pension funds, which generally seek to buy and hold, are dominating order books and are driving pricing. In fact, these investors now represent an average of 85% to 90% of orders in corporate bond issues in 2008. What’s more, they hold individual orders larger than they would have done a year ago. This is in contrast to hedge funds and bank proprietary desk whose order sizes are significantly smaller than in 2007.
Many corporate borrowers have traditionally turned to the Eurobond market for their long term funding, but with market conditions substantially different to those of last year, is it still realistic to look to Eurobonds as a source of funding? In RBS’s view, although the current market may be a more challenging one, there have been, and remain, windows of opportunity for many potential corporate issuers.
According to Dealogic Bondware, corporate issuance of bonds denominated in euro and sterling has reduced by 10% from a year ago in the UK, with a 15% drop in Continental European issuance. However, April and May were record issuance months with strong demand from investors driving a significant number of transactions. It is often said that ‘change is the only constant’, and nowhere is this more true than the bond markets at the present time. Volatility remains the key driver, with every new piece of news sparking a new period of flux, leading to opening and closing of issuance windows. To date, financial institutions have experienced more volatility than corporates as concerns about liquidity in the financial industry have been in the forefront of investors’ minds. The majority of investor demand for corporate paper has been in highly regarded, non-cyclical credits, whereas in financial institutions, demand has pre-dominantly been for ‘too big to fail’ type names.
Timing is, of course, essential to delivering a successful transaction with some price tension. At certain times, investors are still receptive to new issues, while at others, generally for a period of a few days after a gloomy news release, they are stepping back from committing to new deals. This is resulting in intense periods of issuance as illustrated during the month of May, followed by periods of very little activity.
Although many market participants look back over a year of ‘doom and gloom’, there have been particular events which have marked a watershed. Firstly, prior to the sale of Bear Stearns to JP Morgan Chase in March 2008, investors were concerned about systemic risk which affected the whole credit market. With the Federal Reserve’s effective backstop to protect Bear Stearns’ debt holders, investors gained confidence in the market overall, which led to a rally in credit spreads and a two month surge in corporate new issue volumes.