Draghi's Corporate Bond Bid Drives European Sales Toward Record

Mario Draghi is propelling European corporate bond issuance toward a record.

Non-financial companies sold 49.4 billion euros ($56.3 billion) of notes in the single currency in March, just 400 million euros shy from an all-time high of 49.8 billion euros a year earlier, according to data compiled by Bloomberg. Issuance last month eclipsed the 34.8 billion euros of capital raised in January and February, and was the third highest on record, the data show.

The European Central Bank president’s announcement of an expansion of its 1.5 trillion-euro stimulus package to include corporate bond purchases fueled a recovery in issuance from the worst start to a year since 2011. Investors and borrowers had previously shunned the region’s credit markets amid a slump in commodity prices and concerns that global growth was slowing. 

“If I were a corporate, I would make hay while the sun shines,” said Eden Riche, the London-based global head of high-yield and emerging-markets syndicate at ING Bank NV. “At these levels, corporate users of the debt capital markets should be looking to sell as much as possible for as long as possible.”

Draghi said on March 10 that the ECB will begin buying corporate bonds at the end of the second quarter. Purchases will consist of high-grade non-financial bonds from companies in the euro area, he said, without naming specific issuers or securities. The decision marks a dramatic expansion of the central bank’s program to bolster the 19-nation euro area’s lackluster economy.

The announcement drove down the cost of debt and brought some of the most creditworthy companies closer to borrowing for free. Sanofi, France’s biggest drugmaker, sold bonds in euros with the lowest yield on record for a non-financial company on Tuesday, data compiled by Bloomberg show.

It also fueled a rally in secondary markets, where about 21 billion euros of highly rated corporate bonds are trading with yields below zero, the data show.

The average yield investors demand to hold investment-grade corporate bonds in euros fell to 1.11 percent on March 31 from 1.3 percent on March 10, according to Bank of America Merrill Lynch index data.

Bonds sold by top-rated companies in peripheral European countries were among the best performing in the period, the index data show. Average yields on the securities dropped to a record 0.77 percent from 1.13 percent at the beginning of March.

Order Book

“The mere announcement of the corporate bond-buying program by the ECB has instigated a surge of new issuance,” said Mitch Reznick, London-based co-head of credit at Hermes Investment Management, which oversees $33 billion. “You don’t want to compete with Draghi in the order book of new issuance.”

Anheuser-Busch InBev NV’s record 13.25 billion-euro bond sale to help finance its $110 billion purchase of SABMiller accounted for more than a quarter of total issuance in March. Deutsche Telekom AG, BT Group Plc, Daimler AG and Petroleos Mexicanos, were the next four biggest issuers, selling a combined 14 billion euros.

Sales will continue to surge in April and slow only when the ECB’s purchases are near, according to strategists at Morgan Stanley. Issuers may delay bond sales to get better terms if they expect the central bank will buy their securities, said Srikanth Sankaran, head of European credit and asset-backed securities strategy at the bank in London.

“Both issuers and investors will want to see where the ECB comes in, in terms of the eligible paper,” Sankaran said.

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