Eat, drink, and be wary?
European bond investors will soon get the chance to indulge in a substantial slug of new debt issuance. Brewing giant Anheuser-Busch InBev NV is taking advantage of a thaw in corporate credit markets to sell €13.25 billion ($14.7 billion) of debt, Bloomberg News reported on Wednesday.
The whopping new bond issue will be the largest euro-denominated corporate bond offering ever, comfortably surpassing a previous €9.75 billion record set by Roche back in 2009. It is also the latest in a rapid-fire series of new issues amid a broad rally in corporate credit. More than €46 billion of new euro-denominated bonds have been sold into the market in the past four days alone, thanks largely to the animal spirits roused by the European Central Bank.
Among the many stimulus measures announced by the ECB last Thursday is a new program that will see the central bank buying, for the first time, nonfinancial corporate bonds in an effort to lower borrowing costs even further. While details of the plan have yet to be announced, analysts are looking to previous asset-purchase programs for clues to the potential direction and efficacy of the ECB's new corporate bond buying.
The ECB has been purchasing new and old covered bonds, a stalwart of European capital markets, for years through three separate programs. Meanwhile, the central bank's Asset-Backed Securities Purchase Programme (ABSPP) began in November 2014 and is due to last at least two years. Both programs initially sent respective debt rallying but eventually saw the bonds selling off for various reasons.
"History is not necessarily a carbon copy guide to the future. But we are not surprised to see corporate bonds initially reacting in a similar fashion. So far, we have experienced jubilant initial sentiment in and around the ECB announcement," said HSBC credit analysts led by Jamie Stuttard. "However, should either the quantity of the program then disappoint, as with ABS, or the program encourage more [euro-denominated] primary supply (e.g. more reverse yankees and euro issuance from non-eurozone issuers), corporate spreads would be pressured wider in a few months’ time, just as they were in ABS and covered bonds."
So far there is little sign of a deteriorating dynamic. European credit spreads continue to trend ever narrower and AB Inbev's €13.25 billion bond sale has attracted some €31 billion of orders from investors who clearly need to put their cash to work.
But therein lies another potential glitch. With previously sold bonds in the so-called secondary market already locked up in investors' portfolios, the central bank may be forced to look to the already crowded arena of new issuance in the primary market to buy enough debt to incite their desired effect.
"Should the ECB wish to achieve size, then primary participation is the only option," the HSBC analysts said. "There simply is not enough liquidity in secondary markets to accumulate quantity quickly on an ongoing basis in all market conditions."
With investors clamoring for new-issue bonds, the ECB will have to tread carefully for fear of crowding out other potential buyers. Some have suggested that the central bank could avoid the matter by targeting bonds that are not easily attracting billions of euros worth of orders, but that comes with its own particular problem for the central bank: moral hazard. It's unclear whether the ECB would be willing to assume a lender-of-last-resort role for the kind of companies that aren't easily attracting investors during a broad-based credit rally.
While much is up in the air, given that the ECB has yet to release technical details of its bond buying program, another presence at the primary market party could yet turn out to be more problematic than some investors envision.
As HSBC put it: "Book oversubscriptions can be huge; participants are unlikely to welcome yet another mouth to feed in the new issue allocation process."