The Capital Markets Rebound
Verizon’s record-breaking bond is the latest in a trend of issues increasing activity in the debt capital markets, particularly larger sales of euro bonds.
When Verizon completed its $130bn acquisition of Vodafone’s 45% stake in Verizon Wireless, it did not only indicate a pick-up in M&A activity. Verizon issued a $49bn bond to help finance the deal, which drew in more than $100bn in demand, setting a new precedence for bond issues worldwide.
Whilst issues attached to acquisitions of this scale will remain relatively rare, increasing numbers of large corporations are turning to the debt capital markets to raise funds. Although total global corporate bond issues are down 2 per cent on the first nine months of 2012, high-yield corporate debt totals $345.8bn so far during 2013. This is an increase of 26 per cent, and signals the best first nine months for global high-yield debt on record.
According to Mark Bamford, head of global fixed income syndicate at Barclays, “The corporate credit market is in very good shape, and that applies not only for the dollar market, but the same depth can be seen in euros and sterling.” In fact, it is actually the European market that seems to have driven this surge. So far this year, €35.9bn of bonds denominated in euros have been issued, an increase of 46 per cent on the same time last year (Dealogic).
Procter & Gamble is one of the latest American companies to issue a euro-denominated bond, for €750m that was heavily oversubscribed. One of the joint book-running managers and head of European debt capital markets at Morgan Stanley, Marcus Hiseman, said: “There has been a lack of euro-denominated issuance to meet investor demand.” Therefore, increasing numbers of companies are turning to Europe to take advantage of this.
Procter & Gamble joins Wells Fargo, Ford Motor and Microsoft, all US-based entities which have issued bonds denominated in euros or sterling in recent months. Non-European companies have issued so many euro bonds that we are now at the highest level since the financial crisis.
Asian-Pacific companies in particular are seeing the benefits of European capital markets, accounting for 37 per cent of the total euro bonds, up from 33 per cent last year. Frazer Ross, managing director of corporate debt syndicate at Deutsche Bank, thinks that many investment-grade Asian companies have been wrongly treated as emerging markets by US investors. “Europe is the world’s second biggest capital market. Asian issuers are beginning to realise that in addition to the benefits of diversifying your investor base, Europe is open for good volume and good size at a very competitive price.”
Moreover, interest rate risk in the European market is much less prevalent than in the US. Andrew Sheets, from Morgan Stanley, says: “Relative supply volumes, relative pricing and lower European systemic risk have all created a materially better environment.” As a result, companies have been able to issue bonds with interest rates 50 to 60 basis points lower than would have been possible in the US. The US market has additionally seen greater volatility due to uncertainty over the time-scale of tapering.
As demonstrated by the Verizon issue, this increase in activity in the capital markets bodes well for M&A. The easily-accessible debt markets allow companies to consider large strategic acquisitions. There have been warnings that liquidity has been sapped from the wider debt market by new regulations, which have made it more difficult for smaller and older issues to be traded. “One takeaway from Verizon is that for some companies it may be more sensible to come to markets and raise, for example, $1.5bn at once, instead of coming with three or four sales worth $500m every six months,” says Brad Rogoff, head of credit strategy at Barclays. This would make it easier to trade bonds in the secondary market.
However, “Creating larger and more standardised bonds could lead to a wall of refinancing needs that come due all at once”, say Alloway and Rodrigues in the Financial Times. Instead, companies would prefer to have their obligations spread out. Nevertheless, Mark Howard, head of US credit strategy at BNP Paribas, notes, “When it comes to large acquisitions, each case is unique. Because a company like Verizon can raise $49bn in one afternoon, it doesn’t mean everybody else can or will do it.”
Alloway, T., & Rodrigues , V. (2013, September 18). Verizon’s $49bn bond sale whets appetite for larger issues. Financial Times.
Bolger, A. (2013, October 29). Procter & Gamble taps demand for euro-issued debt. Financial Times.
Bolger, A. (2013, October 15). Volume of foreign-issued eurobonds jumps. Financial Times.
Cross, T. (2013, September 9). High Yield Bond Volume Rises To $8B, Thanks To Sprint. Forbes.
Linsell, K. (2013, November 8). Companies Sell Most Bonds in Two Months in Europe as Yields Fall. Bloomberg.
Rodrigues, V. (2013, September 26). Verizon’s $49bn issue signals merger upswing. Financial Times.
Thompson, C. (2013, October 21). M&A bonds surge to highest in six years. Financial Times.
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