For any European capital markets bankers mulling their prospects in 2019, here are a couple of sobering statistics.
First, debt. Through its quantitative easing (QE) programme, the European Central Bank has been hoovering up about €8 billion to €9 billion of investment-grade corporate bonds every month, but total redemptions in the asset class in the next 12 months are expected to be just €6 billion.
Now for equity. In 2017, far from a vintage year for European ECM, there had been 17 selldowns of more than €1 billion. In 2018, there were just five.
The statistics – cited by Barclays bankers Marco Baldini and Tom Johnson at a press briefing by the bank on December 14 – set the scene for the year to come. And while Barclays was keen to pitch itself as almost uniquely suited to the conditions, the bigger picture is decidedly mixed.
More than in any other year, in Baldini’s view, 2018 showed the European corporate debt market moving away from Europe. He could not remember another year when more issuers had mandated Barclays on deals initially slated as sterling or euros, only to change tack during execution and opt for dollars. And sure enough, the bank led nine out of the 10 biggest yankee deals in 2018.
That said, it wasn’t a stellar year for dollar corporate bonds, despite early hopes of a record. It has ended with a bit of a whimper – but also unsurprisingly. Baldini fears that December might end up being the quietest US dollar investment grade month for 10 years.
The lack of surprise is down to the fact that fixed income benchmarks are down for the year and that many portfolio managers will of course have underperformed even those. As the year end approached, damage limitation was the watchword.
“Investor engagement has tailed off significantly,” said Baldini.
It added up to perhaps the most uncertain end to a year for many years. And it wasn’t just Brexit. It was all the old favourites, like trade, oil and China. There was a simple reason why such concerns were being consistently raised: credit markets and financial assets in general were still overvalued because of central bank QE.
We don’t need a bull market, but we do need less volatility- Tom Johnson, Barclays
Not only was Brexit not the dominating concern, in Baldini’s view, but it was merely “another item”. When investors were particularly concerned about the market, they raised it as an issue, but when they were not, they did not. And the truly domestic UK borrowers that rely on the sterling market – the likes of local utilities or housing associations – are able to rely on a deep bench of domestic investors.
And rising rates? Well, in high yield and emerging markets there has been surprising resilience in spite of sporadic crises and a tightening of US policy. A late sell-off, yes, but a solid pipeline.
Bankers clutch at positives and one that debt folk are looking to is the return of private investors as rates rise. But broader expectations of appetite are also positive. Institutional investors are not telling bankers they don’t want to be in segments such as high yield or emerging markets – it’s a question of price. Baldini sees the ending of QE and the return of “more realistic risk premia” as a catalyst.
The outlook for European ECM issuance is a little more nuanced. Volumes were the third lowest for 15 years in 2018, although IPOs were about the same as in 2017. The fee pool was almost the worst it has been since the financial crisis. What would it take to make things better?
“We don’t need a bull market,” says Barclays’ Johnson, “but we do need less volatility.”
But as with the debt markets, Brexit is not the end of the world. Barclays wrapped up a £30 million equity sale in a UK telco, Gamma Communications, on behalf of an Asian buyer on December 13, the very night of the Conservative Party’s vote of confidence in prime minister Theresa May. Of the six investors wall-crossed ahead of the deal, only one referenced that juxtaposition.
Ironically, the region’s lower fee pool in 2018 has in some ways been attributable to better conditions – Johnson blamed the lower number of financial institution sector restructurings. But he also gave what sounded like a hedged outlook for the year; a rougher macro picture would see more distressed situations and therefore more scope for restructuring deals, a better one might see a continuation of the perky climate for M&A, particularly if asset prices stay low. Some bankers say talk of public-to-private deals is louder than it has been for a while.
What is clear is that share prices are reflecting the fact that the marginal buyer of UK assets is not coming from outside the UK at the moment. It didn’t need a perfect solution, but more clarity, said Barclays, would get those investors back in the tent.