(Bloomberg) -- Europe's company bond sales have made an underwhelming start to 2018 and the key month of March is unlikely to bring much more cheer.
Euro investment-grade sales in what is typically one of the busiest months of the year may fall from a year earlier amid drags including Italian elections, a probable U.S. rate increase and the early Easter vacation. Those challenges are in addition to strong cashflows and global market volatility that fed an about 30 percent sales slump in the first two months of the year, data compiled by Bloomberg show.
This month's euro non-financials activity may be “below historical levels” and come in at about 30 billion euros ($36.6 billion), said Duane Elgey, a director of debt syndicate at Societe Generale SA. That's after a “pretty disappointing” January and February, he said. Markus Steilen, a credit syndicate director at Commerzbank AG, expects about 25 billion euros of issuance.
March is a key period for corporate bond sales, with average issuance of about 40 billion euros over the past three years, fueled by the end of the earnings season and huge deals by Volkswagen AG and Anheuser-Busch InBev SA. A small pickup versus February could therefore leave investors struggling to deploy funds, particularly if the European Central Bank keeps up its purchasing rate and if global markets remain calm, damping secondary trading.
“There will be a challenge,” said Alexander Barth, a fund manager at Union Investment Privatfonds GmbH, which is part of a group overseeing about 320 billion euros. “The consequence will be higher prices and lower spreads.”
Investors weathered February's slump by putting funds into cash as well as lower-risk and shorter-duration products, Barth said. Volatility also spurred secondary trading, he said.
The drop in corporate issues in the first two months outpaced a 10 percent decline in overall euro bond sales, Bloomberg data show. The ECB exacerbated the squeeze for investors by maintaining corporate-bond buying at about 1.4 billion euros a week, even after halving overall asset purchases in January amid signs of economic improvement.
Syndicated sales of corporate bonds have started to pick up after a two-week run ended Feb. 23, when only one company sold investment-grade debt. There's been six corporate deals this week, all highly rated, including offers by German retailer Metro AG and Spanish utility Red Electrica Corporacion SA.
Renault's RCI Banque SA got March high-grade euro corporate issuance underway Thursday, raising 1.3 billion euros across fixed and floating-rate notes in its second trip to the euro market this year.
Shipping giant AP Moller-Maersk A/S and China National Chemical Corp. may be next, as both were meeting investors this week. A “handful” of other investment-grade deals are coming into view, according to Sarwat Faruqui, co-head of international syndicate at MUFG Securities in London.
Less Need
Still, companies may have less need to raise cash this year as the growing economy is boosting sales and cashflow. Many corporates also locked in funding last year, including near-record fourth-quarter issuance, to avoid any fallout from the January slowdown in quantitative easing.
“The drop in supply is starting to feel structural,” Barnaby Martin, a Bank of America Corp. credit strategist, wrote in a note last week. “There is much less need for companies to raise debt.”
Suki Mann, the founder of Creditmarketdaily.com, is more optimistic on March issuance. He believes the market has had plenty of warning about risks, and says euro investment-grade corporate volume may surpass 40 billion euros this month.
A key driver will be avoiding a repeat of recent global instability, which fueled a spike in the VIX volatility index and caused bond sales to grind to a halt. Calm markets could tempt potential issuers off the sidelines, said Commerzbank's Steilen.
“There is clearly room for more, but a lot of candidates are undecided when to pull the trigger,” he said.
To contact the reporter on this story: Lyubov Pronina in Brussels at lpronina@bloomberg.net.
To contact the editor responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net.
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