How debt capital markets have changed. Now, when you phone an origination official to ask which borrowers really stand out in the past 12 months, they struggle to conjure up even a handful of names on the corporate side.
Is it a sign of the maturity of the bond market in Europe or has the nature of the debt business truly changed? Although the mainstream debt capital market is growing, it is rarely where the more interesting (or profitable) business takes place these days.
Talk to most originators and they say derivatives and behind-the-scenes structuring is where the real action is. The number of pure origination officials has been scaled back at many firms. The requirement is now for bankers that can offer the broad array of products that the established investment banks can serve up. They are focused on profitability, and in traditional bonds competition is cut-throat. The best opportunities to add value (and make money) are in one-off situations, such as solving pension liability mismatch, or a balance sheet restructuring involving a bond buy-back or a derivative.
A recent flurry of investment-grade corporate bond deals should not mask the fact that the requirement for capital markets financing is relatively small because of strong corporate profitability. Furthermore, the loan market has savagely undercut corporate bonds. The loan terms offered by banks are far too attractive for the typical treasurer to ignore. Only those with more substantial borrowing requirements need to turn to bonds regularly.
After the birth of the euro there was a sense of excitement around the debt capital markets, with borrowers of all kinds establishing annual funding programmes as they sought to build investor bases and market awareness of their names. But that type of activity is now rare. Of course the EIBs and KfWs are always there but public sector borrowers are not known for paying fat fees, and sovereigns continue to bleed their primary dealers dry with onerous demands for liquidity.
It is activity from financial institutions that has kept bond businesses ticking over with interesting flow. Look at the once dull world of covered bonds – now they are centre stage. It is not just the US market that has finally got the point, in the brave new world of Basle II, covered bonds are set to supplant RMBS as the funding tool of choice, although larger banks will still use RMBS to achieve investor diversification.
But there is a cloud on the horizon for FIG bankers. For years banks have leveraged up their balance sheets with innovative hybrids but in Europe few have the capacity for fresh issuance because banks are limited by regulators in how much innovative capital they are allowed to issue. Also, post-Basle II, many banks calculate that they will have too much capital. The likelihood is that banks will be focusing on managing the asset side of their balance sheets.
So what does the future hold for the debt markets? An expansion from what were emerging markets into developing markets is already under way. For developed markets, derivatives, structured finance, structured notes, liability management and tax trades will supply most banks with their bread and butter. The downside of this is that much of this is private business, and that means a lack of transparency.
