Brexit Is (Even) Badder News for Britain's Corporate Bond Market

The market for sterling-denominated corporate bonds looks set to shrink further, analysts say.

"Bring out yer bonds," might soon be the cry ringing through the streets of Britain's corporate debt market.

Analysts at Barclays Plc have taken a self-described "axe" to their forecast for sales of new sterling-denominated investment-grade bonds this year, cutting their 2016 estimate from 35 billion pounds ($46 billion) to 17.5 billion pounds. Plaguing the market is uncertainty surrounding Britain's historic Brexit decision, as well as heightened competition from Europe, where the European Central Bank's stimulus program has helped spur a surge in euro-denominated issuance.

A shrinking pool of sterling corporate debt is a long-running phenomenon that has already attracted the attention of Bank of England economists, who noted in a recent blog post that pension reform and competition with the growing capital markets of continental Europe might help explain four consecutive years of declining British bond issuance. Annual sales of sterling-denominated corporate debt have almost halved since 2012, the bank's economists said.

Last week's Brexit decision is likely to reinforce the trend, Barclays added.

"Our initial forecast was predicated on the view that the sterling corporate bond market had suffered a temporary setback; the dearth of year-to-date bond issuance has instead confirmed the decline of activity in this market was more structural in nature, even before the impact of the U.K. referendum," wrote Barclays' Zoso Davies and Andreas Hetland. "If realized, our forecast implies issuance will fall to levels last seen in 1999, indicating a structural decline in the sterling bond market."

Source: Barclays

A halt in sales of new corporate bonds — Barclays reckons there's merely "potential that markets re-open by September" — would bode ill for the ability of British businesses to finance fresh growth or investment at a time when it could be most needed. While interest rates have been low for years, allowing many companies to liberally refinance their debt, sales of new corporate bonds still remain a key tool for companies looking to expand or buyback their shares. 

While many British companies do sell bonds in non-sterling currencies, finding foreign investors willing to fund British businesses in the midst of Brexit-spurred risk aversion could be tough. U.K. companies might well find themselves in the Monty Python-esque situation of being stuck in a dwindling, more expensive sterling market.


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