The broader implications of the crisis in the financial sector and the uncertainty that it brings to the global economy are starting to feed through to issuers of all types in the European investment-grade world. Borrowers are keener than ever to take on liquidity ahead of the year-end. Indeed primary market bankers are positive about their pipelines, but – with investors nursing significant losses after going long credit this autumn – significant new-issue premiums are back.
"I think that at the beginning of this crisis, even when banks started to shake, many corporate treasurers thought: ‘What does this have to do with me?’ But now they increasingly realize the potential effects the credit crisis could have on the wider economy and that long-term capital is something they should take when it is available," says Eirik Winter, co-head of European fixed-income capital markets at Citi.
It marks a significant change of stance for European corporates that have historically been unwilling to accept paying a new-issue premium over their credit default spreads. At the end of the summer when the financial markets’ dislocation appeared to be at its worst, borrowers such as Enel and AstraZeneca printed new issues some 45 to 50 basis points back from CDS levels. New-issue premiums did grind in to almost flat to CDS by the end of October. However, that was not to last as another wave of downgrades and bank write-offs pushed the entire market wider.
"Up until recently, if you wanted funding you could be sure to get it done," says Jean Marc Mercier, head of syndicate at HSBC. In the second half of November, market conditions deteriorated substantially, forcing many investors and some potential issuers back onto the sidelines. Mercier says that while the pipeline is strong, uncertain market conditions mean that some borrowers will opt to wait for better times.
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Bank spreads under perform corporates |
| iTraxx Europe Series 8 |
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Source: Markit |
"Now we are probably back to a new-issue premium of 40 basis points – depending on the credit. But we have been getting nice-sized books. Our advice is that if you are up to a single-A credit – when it feels good, then pull the trigger and do the deal. If you are double-A, you can pick and choose – unless you are in an acquisition financing scenario," says Winter.
Volatile conditions were highlighted when BT (rated Baa1/BBB+/BBB+) came to the market and was forced onto the defensive, having to pay up for its €1 billion five-year bond with a substantial new-issue premium. The lead managers, Barclays Capital, Citi, Deutsche Bank and SG, priced the bond at a 90bp spread over the mid-swap yield curve. That level was around 40bp wider than where its five-year CDS was trading but there was no question of mispricing as the bond did not rally in the secondary market.
Investors nursing losses
The problem is that almost every credit is as wide, if not wider, than the levels seen in the dog days of the credit dislocation in August. The investors that drove the market during the post-summer rally are hurting – badly. The investment-grade iTraxx series 8 widened nearly 17bp in a month from mid-October.
It is almost as if new issues, no matter how attractively priced, are bound to widen. For instance, take Commerzbank, which borrowed €750 million of lower tier 2 capital in the second week of November. The lead manager, Morgan Stanley, tentatively floated a spread of 125bp but struggled to fill the order book at that rate so printed at 135. Despite this concession, the deal traded 10bp wider on breaking syndication and kept on going.
There is a school of thought that things will not improve until the 2007 reporting season for financials has passed – which is next March. It’s a long time for tough conditions to prevail, given that this crisis kicked off in July.
One hope is that the news from the US housing market will start to improve. But with all expectations that delinquencies and foreclosures will deteriorate further before they get better it would seem that only more interest rate cuts will bolster the credit market. All eyes will therefore be on the Federal Reserve’s next move, expected on December 11.