Take advantage of top grade corporate debt
Euromoney Limited, Registered in England & Wales, Company number 15236090
4 Bouverie Street, London, EC4Y 8AX
Copyright © Euromoney Limited 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored Content

Take advantage of top grade corporate debt

Investment-grade companies are enjoying an unprecedented era of attractive funding as investors scramble for a decent return in a shrinking universe of safe havens. But, says Myles Clarke, Co-Head of Global Syndicate at RBS, such firms must still be careful or the volatile economic climate could jeopardise an issuance.

Myles Clarke, Co-head of Global Syndicate, RBS

Demand for investment-grade corporate debt – that is debt rated BBB or higher – has never been stronger. Media firm Bertelsmann, for example, paid a 7.875 per cent coupon for a five-year bond in 2009. Three years later the German conglomerate is paying just a third of that for debt with double the maturity.

Yields, which move inversely to prices, have fallen thanks to a simple reality: there is more money chasing fewer assets.

Nerves over the eurozone crisis and its effect on global growth have prompted investors to pare down their exposure to stocks and spurred an unprecedented flow into safe haven assets. Whole investment streams, which once soaked up trillions of dollars, appear blocked.

Demand for property and asset-backed securities, which were massively popular in the mid-2000s, has slowed to a trickle. At the same time many traditional safe haven alternatives have either vanished or hold little appeal. Swathes of Europe’s sovereign debt market are shunned by investors, most notably Spain and increasingly Italy, the world’s third largest borrower. The subsequent switch into bunds, gilts and Treasuries has depressed yields to such an extent that investors are effectively paying the German government to hold their money.

The European Central Bank, Federal Reserve and Bank of England have all swelled this surplus pool of cash with liquidity injections. The ECB’s longer-term refinancing operation (LTRO) has been a game changer in this respect. By washing EUR1 trillion through the financial system in December and February the ECB gave many financial issuers a funding avenue that allowed them to by-pass the bond market, thus further reducing supply.

Central bank liquidity injections, combined with the narrowing number of large, liquid markets still attractive to investors, has created a pool of surplus capital worth trillions of dollars.

All of this means that corporate bonds are now attracting interest from those who would normally opt for safe government paper as well as from higher-risk players who would, in better times, be dabbling in stocks and lower-grade bonds.

So far this year, investment-grade companies in EMEA have issued EUR127 billion of bonds, already beating the total issued in the whole of 2011, as companies take advantage of historically low rates.

So why are more companies choosing to issue debt now, given that risks surrounding the eurozone have arguably increased in 2012? Despite the euro’s future now being openly questioned, there is a growing sense that investors have grown used to the worries which, late last year, all but shut down the market. The Vix index, a measure of market volatility also known as the ‘fear gauge’, has fallen markedly (see graph overleaf). The ECB’s liquidity operation is part of the explanation here, but it is increasingly the case that investors are feeling less queasy as they ride Europe’s political rollercoaster and are choosing to take the plunge into debt.


It’s all in the timing

Large, credit-worthy corporates would seem to be in an enviable position, especially given that central banks seem unlikely to end the party and tighten monetary policy soon.

But the situation is not rosy for all such firms. In peripheral Europe, even large, defensive stocks, with steady revenue streams and foreign exposure are paying a premium because of market fears that their home country may drop out of the euro and redenominate debt in a new, less valuable, currency.

Europe’s economic battles can still wound large corporates, even in more stable markets.

In today’s febrile atmosphere one poor sovereign bond auction, an unexpected election result, a misinterpreted central bank comment or a piece of disappointing data has the power to abruptly reverse global sentiment. That could have a drastic impact if it happened just as a company was pricing a bond issue and might prompt nervous finance directors to cancel the move altogether. Getting the timing right will be more important than ever over the coming year, as matters come to a head in Greece and Spain and markets digest the implications of a possible change in the White House.

Today’s volatile environment demands bold thinking from finance directors. Rather like a racing driver picking his moment to exit the pits for a qualifying lap, they and their bookrunners must precisely judge conditions and potential obstacles before fixing on the week, day, even minute to go to market. A few years ago, a bond issue might have run over two days. Today companies often need to get in and out within two hours.

The message to investment-grade companies is simple. Borrowing is cheaper than at any time in recent history, so don’t be too greedy: when a funding window appears, don’t try and knock an extra point off the coupon. Act fast or risk the volatile economic climate jeopardising the whole transaction. 

For more RBS Insight content, click here


The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.

Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.

RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the US Securities Act of 1933. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and subsidiary of The Royal Bank of Scotland Group plc.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.

Gift this article