War, Rate Hikes Overshadow Crucial Month For Europe Bond Market

War, Rate Hikes Overshadow Crucial Month for Europe Bond Market

(Bloomberg) -- A flurry of pent-up company bond sales in Europe is colliding with the most challenging debt-market metrics in a decade this September.

Borrowing costs and risk gauges are on track for their highest levels since 2012 for this time of year as bonds head toward the first bear market in a generation. Traders are pricing in a 75 basis-point interest rate hike from the European Central bank as soon as September.

“The market is transitioning from the long credit cycle of the past years into a new environment,” said Giulio Baratta, head of IG finance and high grade bonds at BNP Paribas SA. Borrowers “acknowledge that volatility may be here to stay,” he said.

Credit Markets Are Way Underpricing Recession Risk, UBS Says

September is arguably the most important month of the year for corporate issuance, as companies rush to lock in funding after the summer lull. This year, they have the threat of recession to contend with as Russian President Vladimir Putin's invasion of Ukraine keeps natural-gas flows on the brink of a shutdown.

Given the fragile energy supplies, it's little surprise utilities and industrial companies dominated the charge back to the primary market, helping it open a full week earlier than in August last year.

Seizing on a drop in yields over the summer, European non-financial firms printed a total of 10.4 billion euros ($10.5 billion) in the second half of the month -- more than in the seven previous weeks combined. Utilities and industrial companies accounted for nearly two thirds of the total, data compiled by Bloomberg show.

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“The utilities sector is an interesting place where the funding and capital need is likely to go up,” said William Weaver, head of EMEA debt capital markets at Citigroup Global Markets Ltd.

At the same time, “for investors, it's about marrying the sectors that actually need the funding, given the market dislocation, with the assets that they actually want to buy,” he said.

A Bloomberg index showing the spread between euro-denominated corporate bonds and government debt fell as much as 18% from its peak at the end of June through to mid-August. The gauge has climbed since then, and despite the summer rally it's still 135% higher than at the same point last year.

As spreads tightened “we advised many issuers to take advantage of these attractive conditions before the market recalibrated wider over the last couple of weeks,” Matthias Reschke, head of European investment grade finance, said in an interview.

Despite companies returning early, European issuance is still more than 60% below its level at the same point last year. In order to catch up with the sales figure for the end of September last year, corporates would need to sell the equivalent of 146 billion euros, according to Bloomberg data.

As years of central bank support for companies ends, the market is still only just digesting the onset of long-term negative sentiment.

Corporate credit spreads are significantly underpricing the risk of a recession, according to UBS Group AG strategists, who say current spreads imply a 25% chance of recession, compared with UBS's forecast of a 55% chance. Investors will demand hefty premiums to offset the economic and geopolitical risks in the new, unfamiliar era of soaring interest rates.

“The pipeline has built up, there is financing that needs to get done,” Reschke said. “Issuers will have to be realistic about the conditions they can achieve.”

EMEA

There are five issuers and six tranches in Europe's publicly syndicated debt market this morning, issuing a minimum of 3.5 billion euros ($3.5 billion), as deals continue to roll in after the summer lull.

Borrowing costs for blue-chip British companies have risen past a key threshold of 5% for the first time in more than a decade, as runaway inflation hammers the nation's corporate sector
Ukrainian state-run energy firm NJSC Naftogaz Ukrainy got the support of creditors to restructure one series of its bonds, while a similar proposal was rejected on another outstanding note
Ozon Holdings, operator of the Russian e-commerce platform, extended an agreement to suspend 2026 bond redemption requirements, according to a statement published on Wednesday

Asia

China's high-yield dollar bonds rallied in August to deliver their best returns in 10 years, after stronger government support for the crisis-hit property sector sparked bets that the worst of a more than year-long rout could be over.

Yield premiums on Asia dollar-denominated corporate bond deals in August compressed by about 19 basis points on average from the initial-guidance stage to pricing, Bloomberg data showed
Southeast Asian high-grade debt outperformed their peers in Asia in August amid expectations the region's economic recovery will be strong, sparking the biggest rally in two years
Lenders in India are set to sell the highest amount of riskier bonds in five years as they boost their capital to meet soaring demand for loans

Americas

Rogers Communications Inc. succeeded in extending a deadline to buy back $9.33 billion of bonds, overcoming objections from some investors about terms of the deal.

Issuance in the $4 trillion US municipal-bond market is set to pick up toward year-end, pushing the annual total near a record high, in part as states and cities step up borrowing to meet soaring costs
Rodan & Fields has engaged with Jefferies to explore financing options amid a sales slump, according to people with knowledge of the situation
An Australian company that rose to prominence as part of the US's Covid-19 rapid test kit rollout has been put into voluntary administration, as demand for its diagnostic products wanes amid a changing pandemic landscape

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