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Shine comes off sterling credit despite BoE firepower
October 7, 2016 / 1:01 PM / in a year

Shine comes off sterling credit despite BoE firepower

* Bond issuance sees sharp decline

* Currency volatility weighs heavily

By Laura Benitez

LONDON, Oct 7 (IFR) - The cracks began to show in the sterling corporate bond market, just one week into the BoE’s stimulus programme, as indigestion following a spate of new supply and torrid currency moves left investors holding big losses.

Companies have issued new sterling bonds relentlessly over the last two months, in bid to secure ultra-low funding costs brought about by the Bank of England’s stimulus measures.

But issuance stopped in its tracks this week with just £300m of supply, compared to the £1.1bn sold the week before.

“The sterling market is experiencing some weakness, which hasn’t been helped by the volatility regarding the currency moves this week,” a banker said.

The UK currency tanked to a 31-year low on Friday, as fears that Britain will suffer a hard exit from the European Union intensified.

The trouble was highlighted earlier in the week, however, when Gatwick Airport attracted just £400m of demand for a £300m 30-year trade, which later capitulated in the after market.

The bond crashed down to a cash price bid as low as 97.40 on Tuesday, according to Tradeweb, the day after it priced at 98.8. And as long-dated Gilts slumped on Friday in the wake of sterling’s “flash crash”, that bid collapsed to just 93.50 - more than five points below reoffer.

“Gatwick was a real surprise, its deals normally do well and this struggled which tells you that the market is over supplied and needs to cool down,” another banker said.

While Gatwick is not yet eligible for the Bank of England’s purchase programme, bankers expected it to emulate the positive momentum seen on Babcock’s deal last week.

That issuer, which is also currently ineligible for BoE purchases, lured over £1.1bn of orders for a £250m deal.

And eligible names saw even stronger demand last month, with National Grid Gas attracting a mammoth £6bn of demand for its £3bn issue, the largest corporate sterling bond of all time.

But bankers said that sterling performance will be closely monitored by investors over the coming weeks, and that only those taking a risk-on approach would opt to buy new deals.

The iBoxx sterling benchmark index has widened since the start of the month from tights of 186bp to 194.8bp on Friday, on an asset swap basis, according to Thomson Reuters data.


Ironically, the market’s struggle comes as the Bank of England showed its firepower and revealed that it had bought £507m of corporate bonds in the first week of its programme.

Over £9bn of investment-grade issuance has printed since the BoE announced its stimulus measures on August 4, as issuers and investor alike sought to take advantage of the opportunity.

The central bank has been purchasing investment-grade corporate bonds in the secondary market since last Tuesday, as it looks to buy up to £10bn over the next 18 months via reverse auctions held every Tuesday, Wednesday and Friday.

Some bankers remain hopeful that the BoE’s influence will once again take hold next week, and say that a handful of corporates are waiting in the wings.

“It’s still an attractive currency for issuers, although we have started to see some decompression in spreads, and price tightening has been more tricky during marketing,” one banker said.

“But we’re hopeful that issuers will take next weeks window as there is still interest.”

Those planning sterling issuance in the coming weeks include Verizon, which has asked investors for feedback on possible eight-year and 12-year euro-denominated deals, and potentially a 20 to 30-year sterling bond, according to an investor who attended the London leg of the roadshow. (Reporting By Laura Benitez; editing by Alex Chambers)

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