Lonely Are The Brave as Brexit Vote Stills Bond Markets

  • Corporate issuance slows to trickle as EU vote breeds caution
  • Intrepid borrowers see reward in costs near record lows

Brexit has stayed Europe’s corporate bond markets.

There have been no substantial corporate sterling deals since May and issuance in euros has slowed to a trickle as markets are roiled by uncertainty over whether the U.K. will vote on Thursday to leave or remain in the European Union.  

Among the brave few to test investor appetite for bond sales, Jack Daniel’s whiskey maker Brown-Forman Corp. said it’s meeting investors this week with an eye to selling bonds. Luxury goods maker Christian Dior SE is the only non-financial company to have sold euro notes this week.

Corporate debt sales slumped more than 60 percent to 11 billion euros ($12.5 billion) this month, compared with the same period in May, on concern the U.K. will choose to leave the 28-nation bloc. Bank of England Governor Mark Carney has warned that the U.K. economy may go into recession after a Brexit vote and Goldman Sachs Group Inc. said the ripples will be felt across the continent.

“No one’s going to want to sell a new issue ahead of the referendum,” said Paola Binns, a portfolio manager at Royal London Asset Management in London which oversees about 85 billion pounds ($125 billion). “The mood in the market keeps swinging one way or the other.”

To subscribe to our referendum night live blog, click here.

Sales have fallen even after European Central Bank stimulus forces borrowing costs toward record lows. Yields on investment-grade sterling bonds dropped to 2.95 percent on June 16, the lowest in more than a year, according to Bank of America Merrill Lynch index data. For similarly rated euro securities, investors seek an average yield of 0.97 percent, four basis points shy of a record.

“Activity slowed down during the course of last week when the topic of the referendum was gaining more traction,” Christian Reusch, co-head of global syndicate at UniCredit Bank AG, said. “Until the announcement of the results come in on Friday, activity will be very low to zero.”

Adler Real Estate AG of Germany postponed a sale of convertible bonds June 15 citing investor uncertainty caused by the U.K.’s looming referendum on European Union membership.

Market Conditions

Brown-Forman’s debt offering could include both or either euro and sterling denominated securities, a person familiar with the matter said last week. The Louisville, Kentucky-based company hired Barclays Plc, Bank of America Corp., Citigroup Inc. and Deutsche Bank AG to manage investor meetings on Tuesday and Wednesday, the person said.

“Any plans we have are, of course, subject to market conditions, Treasurer Gerry Anderson said in e-mailed comments. “While corporate-debt issuance is expected to be quiet, pending the outcome of the vote, investors are willing to meet with us.”

Despite concerns about the referendum result, to be announced on Friday morning, a successful sale may enable Brown-Forman to lock in low borrowing costs. A sale should be well-received, according to Vianney Hocquet, corporate portfolio manager at Pioneer Investments in Dublin.

Christian Dior sold 350 million euros, yielding less than 0.8 percent in Monday’s only non-financial sale in the single currency. While deals have been accumulating because of the lure of low funding costs, the looming Brexit vote has caused companies to hold off on sales. UniCredit’s Reusch said a vote to stay in the EU may further narrow spreads.

“We have a lot of deals waiting in the wings for the referendum and we may have a flurry of new investment-grade deals come to the market after the vote,” said Henrik Johnsson, head of Europe, Middle East and Africa debt syndicate at Deutsche Bank in London. “It could be a very busy July in the new issuance market.”

Before it's here, it's on the Bloomberg Terminal.