Debt: Capital markets roar into life


Hamish Risk
Published on:

Corporate issuance expected to fall by 20%; Financial firms will dominate capital markets this year

The global debt capital markets were quickly into gear in early January, with borrowers keen to take advantage of the buoyant issuing conditions that typified 2009, a record year for Eurobond markets. That’s unlikely to be repeated, but there’s a sense that while the going is good borrowers should grab the opportunity because tougher times might be coming in the capital markets.

Financial firms dominated the beginning of the year, with more than $40 billion of bonds issued in the US in the first week and $24 billion issued on one day, matching the record for a day’s issuance achieved in February 2009. General Electric, Lloyds Banking Group, Dexia and ING Bank were the biggest issuers in the US market.

In Europe, the European Investment Bank and Rabobank led the way for financial issuers. National Australia Bank and Barclays did dollar deals in the US. This is a big year for the banks, with large volumes of debt to refinance and new liquidity rules placing greater burdens on their funding costs.

"There’s pressure on banks in terms of increasing liquidity requirements, so the cost of liquidity will go up, and there’s significant medium-term funding, with senior debt replacing secured debt, it will be a very busy year in the FIG arena," says Richard Boath, co-head of global finance, EMEA at Barclays Capital.

Better quality

The dominance of banks in the capital markets comes as governments wind back their guarantees on bank bonds, which had helped underpin confidence in corporate bond markets last year. This year banks will not only have to raise capital on their own credentials; they will also need to raise better-quality capital.

One likely new trend is the ushering in of a new form of bank capital: contingent convertible securities. It first emerged late last year on the initiative of regulators keen to revamp the hybrid capital markets, which failed to absorb losses when banks became distressed in 2008. Lloyds Banking Group’s bond exchange in November, which enabled existing tier 2 debt to be exchanged for new debt that converted into equity if the bank’s core tier 1 ratio fell below 5%, broke the ice for more transactions of this genre in 2010.

"Lots of banks are currently working on structures like that which have that contingent-type feature and can be put into tier 1 debt immediately,’’ says a London-based syndicate banker. He adds that they will not necessarily resemble Lloyds Banking Group’s equity capital notes but will achieve the same goal as these by bolstering bank balance sheets.

Bankers agree that issuance is unlikely to top 2009’s record volumes but there’s likely to be a heavy weighting towards the first six months of the year, as borrowers anticipate less favourable conditions as central banks remove their liquidity assistance programmes and as sovereign borrowers ramp up their funding programmes later in the year. In Europe alone, sovereign issuance is set to rise by more than a third, to €514 billion, according to Deutsche Bank. That’s more than three times sovereigns’ borrowing requirement in 2007.

Myles Clarke, Royal Bank of Scotland’s newly appointed joint head of EMEA syndicate

"The risks for issuance are in the medium term for sovereigns and financials, so there’s a strong case for moving earlier"

Myles Clarke, Royal Bank of Scotland

"The risks for issuance are in the medium term for sovereigns and financials, so there’s a strong case for moving earlier," says Myles Clarke, Royal Bank of Scotland’s newly appointed joint head of EMEA syndicate. "You’re likely to see 70% to 80% of funding done in the first half."


Provided banks are able to access the debt capital markets, corporate issuers are likely to find friendlier loan markets, particularly for those borrowers that locked in longer term funding in the bond markets in 2009, says Barclay’s Boath. "That combined with uncertainty about the overall level of M&A activity in 2010, leads most syndicate managers to predict a drop in corporate issuance volumes of about 20%, not all that a significant drop given last year’s bumper year."

"We expect a 15% to 20% decline in corporate issuance this year, partly due to a decline of M&A activity and the fact that much of the terming out of short term debt has been done," says Jim Probert, head of Americas investment-grade syndicate at Bank of America Merrill Lynch in New York. That said, "it’s a healthy calendar heavily dominated by financials, so we’d expect this strong pace to continue through the first quarter."

Corporates were slightly slower out of the blocks, with Icahn Enterprises planning to raise $2 billion among the big earlier issuers.

According to Barclays Capital, corporate supply in 2010 is likely to come from a number of first-time borrowers and traditional borrowers as they move from funding through loans to the bond market. For instance, consumer and industrial companies, two sectors most reliant on an end of the recession, are expected to further reduce their reliance on loans markets. Along with telecommunications companies, they are predicted to be the most active borrowers this year.