Originally published by Goldman Sachs on 4 October 2016
US investment grade bond issuance has made waves over the last seven years, while European investment grade struggles to stay afloat – with issuance less than it was a decade ago
Last week US bank Goldman Sachs published a note discussing the wave of supply from global corporate and sovereign issuers, totaling US$5.2 trillion for the year to date.
Central to the article were global issuers taking advantage of historically low interest rates and central bank support, while debt capital markets simultaneously witnessed a high degree of risk taking behaviour.
A key example of this is Italy, who recently issued its longest ever bond with a 50 year term.
Below are some key points taken from the article on divergent paths global corporate borrowers have taken in the investment grade (IG) primary debt market this year, with particular reference to US and European issuance.
1. Europe’s IG year to date supply falls behind pre crisis norms, while US IG runs at record pace
The article noted the following:
European issuers, unlike their US counterparts, have remained hesitant to deploy more debt on their balance sheets, despite having access to extremely low borrowing costs and a stable source of demand from the European Central Bank’s Corporate Sector Purchase Programme (CSPP). Whereas EUR IG supply is 4% slower than the pace a decade ago, US IG issuers, by comparison, have priced a record $1.1 trillion, or double the amount issued in 2006.
Europe’s conservative investment grade bond supply versus the US
2. US IG issuers unleash record supply while Europe’s IG issuers adopt a more conservative approach
The note continued:
Within the US, IG corporate issuers have capitalized on the liquid funding environment by borrowing at an unprecedented rate. At the same time, issuers have adapted to a less liquid secondary market by pricing the largest deal and individual tranche sizes on record, averaging $1.3 billion and $700 million, respectively. Deal sizes have more than doubled compared with the long-term average since 2000 as issuers have recognized investors’ preference for large and often more liquid deals.
How does this compare to European IG supply?
In contrast to the robust primary market in the US, EUR IG supply this year is still trailing pre-crisis norms as the initial stimulus from the European Central Bank’s corporate bond purchase programme has faded. While EUR issuers initially responded to the CSPP’s stimulus, they have been slow to issue more debt since the Brexit vote.
Instead we are seeing European issuers take advantage of the European Central Bank supported environment by securing lower borrowing costs and lengthening out maturities – with Italy’s new 50 year maturity bond a prime example.
3. Italy’s first 50 year bond heaps pressure on beleaguered European market
A recent article from Bloomberg also looked at Europe’s approach to bond issuance amidst a low interest rate environment and negative bond yields. Despite conservative IG supply across Europe, investors looked past volatility emerging from the Italy’s pending constitutional referendum, purchasing five billion euros (US$5.6bn) of the recent 50 year issue. According to the article, it exceeded deals by Spain and France this year for similar maturity bonds; a contrast with the €2 to €3bn estimates analysts made prior to the sale.
The bonds were sold at a spread of 52 basis points (bps) above its 2047 securities, equating to a 2.85% yield. Interestingly, this is a yield percentage that the country couldn’t get investors to pay even for three month bills close to the height of the euro crisis five years ago.
Market strategist from DZ Bank AG in Frankfurt, Daniel Lenz commented on the timing of Italy’s new bond issue, stating that “there seems to be sufficient demand for this kind of bond” – even with the volatile political backdrop. He goes on to comment, “For Italy to place such a long maturity in the market, and to also increase the duration of the whole portfolio, is a success”.
The Bloomberg article can be viewed here.
No sign of releveraging in Europe
The Goldman Sachs article concluded with the following:
While European managements may eventually take advantage of low yields and start actively releveraging their balance sheets like their US counterparts, we continue to expect such a shift to occur gradually until the durability of the broader macro recovery becomes more visible. In the near to medium term, we expect corporations to continue to extend debt maturities and lower their funding costs. Across regions, this leaves us much more comfortable with the fundamental outlook for European corporates relative to their US peers.
Investors are sitting tight to see if further long dated bond issuance will occur in Europe based on Italy’s successful 50 year bond, while US investment grade issuance continues to surge ahead at double the pace since 2006. In any case, the lower for longer interest rate environment remains intact across the globe.