Boom?What boom?

Email a Friend

All fields are compulsory

Your name:
Your email:

To include more than one recipient, please separate each email address with a semi-colon ';'

Recipient email(s):

Email yourself a copy?
Comments:

Add Your Comment

All comments are subject to editorial review.
All fields are compulsory

Your name:
Your email:
(will not appear)

You may email your comment to a friend
To include more than one recipient, please separate each email address with a semi-colon ';'

Recipient email(s):

Publish your name?
Receive email notification of new comments posted by other users?
Email yourself a copy?

Comments:

I have read and agree to the Terms and Conditions

At the beginning of 1999, so the story goes, corporate Europe suddenly got religion about shareholder value. In the wake of the introduction of the euro, a wave of corporate restructuring swept the continent. Lured by growing investor appetite for credit - and with a little nudging from their bankers - Europe's companies plunged into the bond markets. The result was an explosion of corporate bond issuance.
The only problem with this version of history, according to new research by Merrill Lynch, is that it didn't happen. In a report introduced under the heading "The making of a myth", the Wrm's Wxed-income strategists claim that the increase in bond raising was not "the long awaited Big Bang in the eurozone market". In fact, there was only a small increase in net issuance by euroland industrial corporates.
How can this be? Figures from Capital Data Bondware show that eurozone corporate bond issuance increased more than fourfold to over $100 billion in 1999. One problem with these Wgures, says Merrill Lynch Wxed-income strategist César Molinas, is that they don't take account of redemptions.
To Wnd out what the true increase in outstandings was, he looked instead at Merrill Lynch's bond index system. What he found came as a surprise. "This was not the answer I had been looking for," says Molinas. He found that outstandings of bonds in euros issued by industrials from outside the eurozone - notably UK and US borrowers - increased by e64.2 billion in 1999. But net issuance by eurozone corporates grew by only e17.3 billion. "Because there were a lot of redemptions in 1999 you get a huge Wgure for gross issuance," he says. "But net issuance was much smaller."

So most of the upsurge in euro bond outstandings came about because non-eurozone corporates were dabbling in the new currency. In addition, some corporates raised more bonds than they needed to in 1999 because they were worried about the impact of Y2K. That created a one-off increase in issuance.
For Molinas's colleagues on Merrill Lynch's corporate bond desk there is worse news to come. Forget those tempting charts showing how low European corporate bond outstandings are as a proportion of GDP. The eurozone may have an economy of a similar size to that of the US, but there are good reasons to think its bond market ought to be much smaller.
According to Molinas, the main factor that determines the volume of bond issuance in a given market is not the absolute size of the economy but the number of companies with a stock-market listing. The available universe of bond issuers is more or less the same as the number of public companies. That's because listed Wrms already bear a large part of the cost of issuing bonds - publishing regular reports, adopting international accounting practices, paying stock market listing fees and so on. For private companies, loans are likely to remain a cheaper source of funding than bonds.

The corporate bond universe
	US	eurozone
Number of listed firms	7,093	2,468
Of which, industrials	5,724	1,854
S&P universe of rated industrials	850	338
Domestic bond issuers in Merrill Lynch index	450	93
Ratio of issuers to listed industrials	8%	5%
Ratio of issuers to rated industrials	53%	28%
Outstandings	($ billions)	(e billions)
Outstanding in Merrill Lynch index	656.5	126.9
Of which, domestic	571	84
Average outstanding per issuer	1.3	0.9
Median issue	0.6	0.4

Source: Merrill Lynch

Molinas and his colleagues calculate that the number of bond issuers as a proportion of eurozone listed companies is already close to the US ratio (5% in Europe, compared to nearly 8% in the US). So the European market has some room to grow. But not as much as many optimists believe. "The eurozone industrial corporate bond market is smaller because the number of listed euroland companies is smaller," he writes.
But can't we expect the number of listed companies to increase dramatically in Europe? After all there are fewer than 2,500 public corporations in the eurozone compared with more than 7,000 in the US. Apparently not. According to the report, the increase in listed companies in Europe will be "gradual, like a snap, crackle, pop. Nothing like an explosion".
Maybe, Molinas speculates, if Europe gains a growth stock market to compare with Nasdaq, the number of listed companies will take off. "But who's going to play the role of Nasdaq in Europe?" he asks. "If it is down to the traditional exchanges, things may be slow."
The report also points out that many European companies have a much cheaper source of Wnancing available than bonds or equity - a cheaper source than bank loans in fact. German companies, who account for one-third of Europe's economy, can Wnance themselves using pension fund money which is kept on balance sheet.
But it is not all doom for Europe's corporate bond market. While ruling out a Big Bang in issuance, Molinas concedes there is room for substantial rates of growth. The research notes that the ratio of bond issuers to companies with an S&P credit rating in Europe is low. Perhaps many companies have gained a rating with an eye to issuing in the near future.
Don't expect a bumper bond harvest this year though. The report predicts a 30% fall in industrial corporate net supply this year. That's partly because of the distorting effect of Y2K-related overfunding. But more importantly, corporate bond issuance usually falls off a cliff when interest rates are high.
"In the US there is a well-established correlation between interest rates and issuance," says Molinas. He sees no reason for Europe to buck that trend and reckons that euro interest rates may need to go up to 5% if the currency stays below parity with the dollar.
So there you have it. Merrill Lynch says Europe's corporate bond boom is a myth and its companies are going to remain addicted to other forms of funding for years to come.

The US treasury market reaches breaking point

Agriculture:

Boom?What boom?

Email a Friend

Add Your Comment

Dubai looking to life after the bubble

Investment banking: How to make money in 2009

Nigeria’s banks outpace political change

Careers in hedge funds: Job market alive and kicking

Why corporate refinancing is next up in the cycle of despair

Pakistan's richest man in his first foreign interview: Mian Mansha, Nishat group

Pension funds: Widening the short-selling blame game

Agriculture: Farmland is the new gold

The treasury market reaches breaking point

Islamic finance debate: Participants

Investment banking: How to make money in 2009

Dubai looking to life after the bubble

Bank atlas: The world's largest banks 2008, with data from Moodys

Foreign exchange debate - Investing in FX: learning history lessons

Careers in hedge funds: Job market alive and kicking

Latest Issue