Swedish carmaker Volvo shocked buyers this week by borrowing €500mn — a uncommon deal in Europe’s parched company bond markets which might be pin-drop quiet even by summertime requirements.
Buyers positioned €3.2bn value of orders for the deal, which was one in every of only a handful to hit the market in a number of weeks. The quantity raised in European company bonds to date this yr has fallen to the bottom stage in almost 20 years, down 18 per cent in comparison with the identical time final yr. European governments have raised 47 per cent lower than the identical interval final yr, in line with Refinitiv knowledge.
Fairness markets are much more muted. The quantity raised from corporations hitting inventory markets for the primary time has plunged by 92 per cent in comparison with final yr, Refinitiv knowledge reveals.
The slowdown reveals how wobbly markets, a darkish financial cloud from Russia and quickly rising rates of interest are all making it more durable for corporations to faucet markets which were beneficiant sources of funds for years.
“Major markets have been fairly seized up due to the volatility [and] liquidity has been very challenged,” mentioned Snigdha Singh, co-head of European fastened revenue, currencies and commodities buying and selling at Financial institution of America.
Years of low rates of interest, exacerbated by the pandemic, inspired a glut of company and authorities debt offers as executives raised new funds and pushed current debt reimbursement obligations additional in to the long run.
However with vitality worth shocks and world provide chain points, world central banks’ priorities have shifted from stimulating inflation to hosing it down. The European Central Financial institution has halted its decade-long bond-buying programme which had acted as a security internet and supplied consolation to markets because the monetary disaster.
The financial institution has now lifted rates of interest to zero, ending a decade of detrimental charges and following the US Federal Reserve in rising borrowing prices.
Because the ECB has yanked away its security internet and recession looms throughout Europe, buyers have shied away from funding riskier corners of the market. The quantity raised by the lowest-rated, high-yield corporations has plunged 79 per cent to date this yr in comparison with the identical interval in 2021, in line with Refinitiv.
“We had a reasonably substantial pipeline late spring [but said] ‘let’s put down the pen’,” mentioned Tomas Lundquist, head of European company debt capital markets at Citi, including that “in Could and the start of June, the boldness stage that we needed to get the very best pricing wasn’t that top”.
Moreover, the push of bond market exercise over the previous two pandemic years meant that “most corporations had already termed out debt and didn’t have imminent funding wants,” he mentioned.
Volvo’s transfer was extra opportunistic. Lundquist at Citi, which led the deal, mentioned the carmaker’s timing was “superb” after US inflation knowledge was considerably tamer than buyers had feared and that the corporate “reacted in a short time once they noticed this enticing window”.
That has underscored bankers’ reliance on central financial institution coverage to underpin exercise for the remainder of the yr. Buyers and analysts are attempting to navigate the unsure outlook utilizing new knowledge releases, aiming to color an image of whether or not and when inflation will cool and to forecast the trajectory of main central banks’ rate of interest adjustments.
US inflation rose by 8.5 per cent yr on yr in July, a slower enhance in contrast with June and a decrease determine than economists had anticipated — elevating hopes that the tempo of worth rises on this planet’s largest economic system has peaked.
The info had been carefully watched by buyers trying to find clues about how far the Fed will increase rates of interest to curb speedy worth progress.
Markets really feel “on a barely firmer footing” now in comparison with July, one banker mentioned, “with some extra stability and even some new company offers in Europe [in August]. There may be extra optimism.”
Fairness markets could also be slower to rebound. The valuation of corporations that listed out there frenzy over the previous two years have been slashed. For instance, meals supply service Deliveroo’s valuation has plunged to about £1.7bn from greater than £5bn when it listed in London final yr. That has postpone fund managers.
“Corporations that have been considering [listing] are taking time to see how issues settle, and sellers can also want to regulate valuation expectations,” mentioned Tom Johnson, co-head of European capital markets at Barclays.
“After a market fall there may be all the time a little bit of ‘who desires to be the primary to step off the pavement?’ Numerous issuers would like to see knowledge factors from different folks first.”
Debt bankers stay extra optimistic and say they’re inspired by current bond market rebounds. Complete returns from Europe’s riskiest debt is down nearly 10 per cent this yr, however returns have recovered by over 6 per cent since a low in June, in line with ICE Financial institution of America knowledge. An index monitoring larger grade debt has additionally recovered by over 5 per cent since a June trough.
Bankers are hopeful that a few profitable offers may encourage extra to leap in.
“We must always not underestimate the herd mentality,” mentioned Josh Presley, managing director at Credit score Suisse. “One whole lot will open the door for others to comply with.”
