Company Bond Sales to Fall in 2013 After Refinancing Rush
Company debt issuance in Europe will shrink as much as 37 percent in 2013 after sales this year were inflated by borrowers locking in record-low rates to refinance debt early.
Corporate borrowers will raise as little as 105 billion euros ($136 billion) from bonds next year compared with 167 billion euros so far this year, according to Harpreet Parhar, a strategist at Credit Agricole SA (ACA) who compared sales in euros from investment-grade and high junk-rated European issuers. Morgan Stanley (MS) sees a 15 percent fall in high-grade sales in 2013, while Societe Generale SA (GLE) predicts a 6 percent drop.
Company treasurers are taking advantage of rock-bottom yields to raise debt from investors seeking better returns than the near-zero rates on the safest government debt. Borrowers are concerned credit markets will be less benign next year should Europe’s recession worsen and tensions over austerity measures increase amid elections in Italy and Germany.
“There will be some volatility around elections and companies are likely to try and fund ahead of some of those events,” Charles Watford, a credit analyst at PIMCO in London, said by phone. “With yields at record lows and spreads also coming in a lot, we’re seeing more issuance occurring than in the fourth quarter of 2011.”
Volkswagen AG (VOW), Europe’s biggest carmaker, led this year’s sales with 10.4 billion euros of issuance, followed by miner BHP Billiton Plc on 6.2 billion euros and Italian power company Enel SpA (ENEL) at 6.1 billion euros, according to Bloomberg data tracking issuance of non-financial issuance in euros and pounds.
Sales reached a record in September after European Central Bank President Mario Draghi’s pledge to buy unlimited amounts of sovereign bonds boosted investor confidence in euro-area debt. His comments spurred sales from the region’s so-called periphery with Energias de Portugal SA offering the country’s first benchmark-sized corporate bonds since January 2011.
Europe’s car manufacturers issued a record $29 billion of bonds this year as the industry faces $41 billion of redemptions in 2013, data compiled by Bloomberg show. Fiat SpA, Bayerische Motoren Werke AG and Renault SA sold $1.2 billion of notes this week, helping boost this year’s total to almost triple the $11 billion raised in 2011.
“Companies are playing it safe and refinancing earlier,” said Jane Wride, a credit analyst at Invesco Asset Management Ltd. in London. “It makes sense to lock in decent interest rates as demand for paper is currently so healthy.”
Morgan Stanley forecasts a 15 percent decline in sales from investment-grade non-financial companies to 128 billion euros next year, analysts led by Andrew Sheets wrote in a Nov. 23 report. Societe Generale SA predicts 190 billion euros of issuance next year from high-grade and junk companies, compared with 202 billion euros sold so far this year, credit strategist Suki Mann wrote in a Nov. 28 research note.
“We think issuance will be much more modest next year as there’s simply a lower need for cash,” said Credit Agricole’s Parhar, who is based in London.
Yields on non-financial corporate bonds dropped to 1.9 percent from 3.3 percent at the start of the year, according to Bank of America Merrill Lynch’s EMU Corporates, Non-Financial Index. The premium to the benchmark government debt has narrowed 75 basis points, or 0.75 percentage points, to 118 basis points since the end of December.
Returns on corporate debt jumped 9 percent this year, that’s more than double the figure for 2012 and almost three times the 3.3 percent investors made holding German government bonds, Bank of America Merrill Lynch data show.
“It has been the second-best year for credit since 1999, beaten only by 2009,” HSBC Holdings Plc credit strategists led by Lior Jassur wrote in a report. “We caution such performance is unlikely to be repeated in 2013.”
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