Volvo dives into Europe’s “seized” bond markets

Swedish carmaker Volvo surprised investors this week by borrowing €500m. – a rare trade in Europe’s parched corporate bond markets, which are completely quiet even by summer standards.

Investors placed orders worth €3.2bn. for the deal, which was one of just a handful to hit the market in several weeks. The amount raised in European corporate bonds has fallen to its lowest level in nearly 20 years so far this year, down 18 percent from the same time last year. European governments have raised 47 percent less than the same period last year, according to Refinitiv data.

Equity markets are even more muted. The amount raised from companies hitting the stock markets for the first time has fallen by 92 percent compared to last year, data from Refinitiv shows.

The slowdown shows how shaky markets, a dark economic cloud from Russia and rapidly rising interest rates are all making it harder for companies to tap into markets that have been generous sources of funds for years.

“Primary markets have been quite seized because of the volatility [and] Liquidity has been very challenged,” said Snigdha Singh, co-head of European fixed income, foreign exchange and commodity trading at Bank of America.

Years of low interest rates, exacerbated by the pandemic, encouraged a glut of corporate and sovereign debt deals as executives raised new funds and pushed existing debt repayment obligations further into the future.

But with energy price shocks and global supply chain problems, global central bankers’ priorities have shifted from stimulating inflation to reducing it. The European Central Bank has halted its decades-long bond-buying program, which had acted as a safety net and provided comfort to markets since the financial crisis.

The bank has now raised interest rates to zero, ending a decade of negative interest rates and following the US Federal Reserve in rising borrowing costs.

As the ECB has chipped away at its safety net and recession looms across Europe, investors have shied away from funding riskier corners of the market. The amount raised by the lowest-rated high-yield companies has plunged 79 percent so far this year compared to the same period in 2021, according to Refinitiv.

Bar chart of amounts raised through sovereign debt issuance ($bn) showing European governments' fundraising decline from pandemic highs

“We had a pretty significant pipeline in late spring [but said] ‘let’s put the pen down’,” said Tomas Lundquist, head of European corporate debt capital markets at Citi, adding that “in May and early June, the level of confidence that we had to get the best possible pricing was not that. high”.

In addition, the flurry of bond market activity during the past two pandemic years meant that “most companies had already written off debt and had no immediate financing needs,” he said.

Bar chart of high-yield bond issuance ($bn) showing riskiest European companies facing debt deal drought

Volvo’s move was more opportunistic. Citi’s Lundquist, who led the deal, said the carmaker’s timing was “very good” after US inflation data was somewhat tamer than investors had feared and that the company “reacted very quickly when they saw this attractive window”.

It has underlined banks’ reliance on central bank policy to support activity for the rest of the year. Investors and analysts are trying to navigate the uncertain outlook with the help of new data releases, aiming to paint a picture of if and when inflation will ease and to predict the path of major central bank interest rate changes.

US inflation rose 8.5 percent year-on-year in July, a slower increase compared with June and a lower figure than economists had expected – raising hopes that the pace of price increases in the world’s largest economy has peaked.

The data had been closely watched by investors looking for clues about how far the Fed will raise interest rates to curb rapid price growth.

Markets feel “on a slightly firmer footing” now compared to July, one banker said, “with some more stability and even some new corporate deals in Europe [in August]. There is more optimism.”

Equity markets may be slower to rebound. The valuations of companies that have listed in the market frenzy over the past two years have been slashed. For example, food delivery service Deliveroo’s valuation has fallen to around 1.7bn. pounds from more than 5 billion pounds when it went public in London last year. This has discouraged fund managers.

“Companies that considered [listing] takes time to see how things settle and sellers may also need to adjust valuation expectations,” said Tom Johnson, co-head of European capital markets at Barclays.

“After a market decline, there’s always a bit of ‘who’s going to be the first to hit the pavement?’ Many issuers would prefer to see data points from other people first.”

Debt bankers remain more bullish, saying they are encouraged by the recent recovery in the bond market. The overall yield on Europe’s riskiest debt has fallen nearly 10 percent this year, but yields have risen more than 6 percent since a June low, according to data from ICE Bank of America. An index that tracks higher-quality debt has also risen more than 5 percent since a June low.

Bankers are hoping that a few successful deals can encourage more to jump in.

“We shouldn’t underestimate the herd mentality,” said Josh Presley, managing director at Credit Suisse. “One good trade will open the door for others to follow.”

Leave a Reply

Your email address will not be published.