The Future of Capital
Forget the broken banking system
Even governments face supply constraints
In early December 2008, Société Générale compiled wide-ranging forecasts for euro-denominated debt capital markets issuance in 2009. Even while recognizing that extreme nervousness might close the markets down at various points this year, and basing its central estimate on markets being open for just nine months out of 12, the bank still expects €1.5 trillion of debt issuance, almost a return to the 2007 volume of €1.602 trillion and an increase of 35% on the €1.18 trillion of new debt sold in the first 11 months of 2008.
Even if markets are shut for half of 2009, the bank still expects a 15% increase in volumes over the 2008 figure for the year to the start of December.
The lion’s share of this increase will come from sovereigns, supranationals and agencies as governments seek to fund financial system bailouts and economic stimulus as revenues slump. The bank also expects government-guaranteed bank debt, a new sector that came into being only in the last quarter of 2008, to become a €300 billion market in 2009.
For intermediaries, the good news is that they are charging healthy fees to banks to do these government-guaranteed deals and are using that to beat some of the frequent supranational and agency issuers into paying higher fees to come to the capital markets. The frequent borrowers don’t like it but they no longer have the whip hand. Some banks have turned their primary business down rather than bring deals for zero fees as they used to.
The bad news is that Société Générale expects new issues of non-guaranteed, senior unsecured bank debt to halve this year; issues from investment-grade corporates to decline by 15% and the euro non-investment-grade market to proceed at the same pace as it has since July 2007: that is at as close to zero as makes no difference.
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Debt becomes an arm of the state |
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Projected DCM volumes, 2007–2009 |
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Source: Société Générale |
Jean-François Mazaud, deputy global head of capital raising and financing at Société Générale, says: "We think there could be an eviction effect in some segments of the market if volatility and risk aversion was to remain as high as today. To the extent that investors have an appetite for risk and yield, strong single-A names provide it. Why should they accept low BBB with a strong cyclical profile or cross-over paper, except at a high premium? And we see some very large utilities and telcos and the like working on the assumption that liquidity will be rationed and preparing to pre-fund."
He concludes: "The right approach for the debt markets with the current volatility is to be extremely opportunistic, to take the windows when they open with a view to stage the refinancing exercises so as to avoid creating walls of liquidity."
In the high-grade US bond market, JPMorgan forecasts $725 billion of new supply in 2009 from financial and corporate issuers, up by 9% from $665 billion in 2008, with FDIC-guaranteed bank issuance rising to $150 billion this year. JPMorgan predicts that volume in the corporate primary market will be down slightly to $275 billion this year from $298 billion in 2008, as the slowing economy reduces the requirement to fund capital expenditure or mergers and acquisitions.
The key challenge for both corporates and financial issuers will be the $650 billion in bonds falling due this year, up from $560 billion in 2008, following decisions by some issuers, amid the market turbulence of the final quarter, to postpone new deals they had hoped to complete last year.