Five Charts Show Europe’s Corporate-Debt Party Is Barely SlowingBy and
Junk-bond sales surge along with sterling-denominated issues
Volkswagen returns to market and euro borrowing costs fall
Europe’s corporate-debt bankers and investors can look back on another good year in 2017. What comes next may be more challenging.
Returns were solid across the market this year, and issuance surged for junk bonds and sterling notes. Investment-grade debt missed out on the boom with euro issuance little changed from a year earlier, even with the return of sales king Volkswagen AG.
Moving into 2018, credit investors will be watching out for reactions as the European Central Bank pares its asset-purchase program. There will also be a focus on interest rates in the U.K. as the country moves toward leaving the European Union.
Here are five charts summing up what happened in 2017:
Euro investment-grade and high-yield bonds both posted positive returns in 2017, even if they trailed dollar notes and 2016 performances, based on ICE BofAML indexes. Contingent-convertible bank bonds, or CoCos, remained credit stars, overcoming the first write-off in the $150 billion additional Tier 1 debt market. Banco Popular Espanol SA AT1s were bailed in as part of the lender’s 1-euro sale to Banco Santander SA in June.
Europe’s high-yield bond market had a bumper year, with record corporate sales equivalent to 96 billion euros ($115 billion), according to data compiled by Bloomberg. Investors’ hunger for yield amid rock-bottom interest rates fueled demand, including for the riskiest notes. Sales of corporate debt rated at least seven levels below investment grade hit a record 7.4 billion euros. Across Europe’s junk-bond market, proceeds were mainly used to refinance existing debt at lower rates. Next year, there may be more focus on M&A funding.
Volkswagen returned to the euro debt market in March after an absence of almost two years caused by a scandal related to falsified emissions tests. The automaker quickly regained its title as the biggest corporate issuer with sales of about 21 billion euros through December, according to data complied by Bloomberg. The company led issuance for five straight years up to 2015 before the sales halt. Overall, 2017 issuance of investment-grade corporate debt in euros was little changed from a year earlier at about 270 billion euros.
European Central Bank bond-buying drove a second straight annual decline in euro-denominated borrowing costs for both investment-grade and high-yield companies. The average yield demanded by holders of highly rated debt has fallen by about half since the end of 2015, while the junk-bond market has seen a drop of more than 2 percentage points to 3 percent. Yields may face upward pressure in 2018 as the ECB will halve asset purchases to 30 billion euros a month starting in January.
Sales of sterling non-government bonds surged more than 80 percent in 2017, even as the Bank of England ended corporate-debt purchases and raised interest rates for the first time in more than a decade. Financial companies more than doubled sales from a year earlier as they returned to the market following disruptions caused by the U.K.’s 2016 vote to leave the European Union. Corporate issuers also locked in cheap financing amid concerns that higher inflation from the weaker pound could stoke borrowing costs.