Corporate bonds
Pimco, the world’s largest bond investor, switched out of lower-rated corporate paper in favour of higher-rated bonds last month, amid fears that the corporate bond market bubble might be about to burst. But there’s a counter-argument: in Europe, buy-side demand for credit means that smaller, even unrated, corporates might be able to come to the market for the first time next year.
“Some companies are too small to be listed yet corporate lending cannot finance all their growth,” says Christian Dinesen, head of European credit research at Merrill Lynch. “Given the bid for credit at the moment, it seems that these sorts of high-quality companies, perhaps even those that don’t have a corporate rating, could come to the market.”
Dinesen points out that there are also a lot of triple-B rated issuers that would be rated single-A were it not for the small size of their companies.
Some syndicate heads agree that investors are prepared to consider corporates that they might not have looked at before. “When the market is not heavily supplied and with the supply there is coming mainly from financials, investors are going to give new corporates a better hearing,” says Michael Ridley, head of European syndicate for JPMorgan.
“Investors who would have only bought into issues of €500 million and over in the past because they wanted the liquidity will now consider €300 million issues. Whether it is a €300 million or a €500 million bond, the extreme shortage of supply in the market means that they are likely to be fully placed anyway.” He says that the strong bid for structured credit and CDOs means any new credits that can add to the diversity of the underlying pool of credit will be considered.
Sudden surge
It could be that the bank intermediaries are missing out on an opportunity. “The days of jumbo bonds are gone yet originators don’t seem to be focused enough on the opportunities presented by small to medium-size issuers,” says one commentator. However, a sudden surge of smaller corporates in the market would also mean a lot more work for fundamental analysts.
The appeal of these names seems counterintuitive at a time when Pimco has been replacing low investment grade triple-B rated credits with more highly rated single-A or double-A rated credits in its portfolio.
Yet Ridley adds that just because investors are looking for diversity in new corporate names doesn’t mean they will now buy anything. Small first-time issuers might not have to have a corporate rating but they would still have to have a strong balance sheet.
The ability of investors to accept smaller issues does make the European market more appealing to smaller companies. There are many smaller companies that might not need €500 million of financing but could use €300 million. But Ridley doubts that small European firms have a huge amount of need given the surplus liquidity in the bank market and the favourable conditions in the US private placement market, neither of which demand either the documentation of the European public bond market or the rigours of roadshowing from the debut issuer.
“There’s certainly the scope for this to happen but I don’t think we’re going to see a flood of Mittelstand-type companies coming to the market, particularly when the US private placement market is offering such aggressive terms and their local banks are probably very happy to lend them this money,” he says.
