Connect with us

top14

Volvo dips in to Europe’s ‘seized up’ bond markets

Published

on

#Volvo #dips #Europes #seized #bond #markets

Swedish producer Volvo AB 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, from the financing arm of the truck and bus maker, whose bond deal was certainly one of only a handful to hit the market in a number of weeks. The quantity raised in European company bonds up to now this yr has fallen to the bottom degree 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, based on 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 exhibits.

The slowdown exhibits 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.

“Main 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 coronavirus 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 value shocks and international provide chain points, international 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 unfavorable charges and following the US Federal Reserve in rising borrowing prices.

Column chart of Amount raised through sovereign debt issuance ($bn) showing European governments’ fundraising drops from pandemic highs

Because the ECB has eliminated 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 up to now this yr in comparison with the identical interval in 2021, based on 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 arrogance degree that we needed to get the absolute best pricing wasn’t that prime”.

Moreover, the frenzy 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 truckmaker’s timing was “excellent” after US inflation knowledge was considerably tamer than buyers had feared and that the corporate “reacted in a short time after they noticed this engaging window”.

That has underscored bankers’ reliance on central financial institution coverage to underpin exercise for the remainder of the yr. Buyers and analysts try 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 value rises on the planet’s greatest financial system has peaked.

Column chart of High-yield bond issuance ($bn) showing Riskiest European companies face a debt deal drought

The information had been intently watched by buyers trying to find clues about how far the Fed will elevate rates of interest to curb speedy value 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’s extra optimism.”

Fairness markets could also be slower to rebound. The valuation of corporations that listed available in the market 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 delay fund managers.

“Firms that had been considering [listing] are taking time to see how issues settle, and sellers may additionally want to regulate valuation expectations,” mentioned Tom Johnson, co-head of European capital markets at Barclays.

“After a market fall there’s at all times a little bit of ‘who desires to be the primary to step off the pavement?’ A whole lot of issuers would favor to see knowledge factors from different folks first.” 

Debt bankers stay extra constructive and say they’re inspired by current bond market rebounds. Complete returns from Europe’s riskiest debt is down virtually 10 per cent this yr, however returns have recovered by over 6 per cent since a low in June, based on ICE Financial institution of America knowledge. An index monitoring increased grade debt has additionally recovered by over 5 per cent since a June trough.

Bankers are hopeful that a few profitable offers would possibly 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 observe.”

This text has been amended since publication to replicate that the bond deal entails Volvo AB, quite than Volvo Automobiles