August 22, 2019 / 11:51 AM / a month ago

What summer lull? Bankers prep for corporate bond rush as yields shrink

LONDON, Aug 22 (Reuters) - European companies are expected to take advantage of some of the lowest borrowing costs ever to try to issue as much debt as possible when the market reopens after the summer break - or perhaps even sooner, bankers said.

Negative yields will also feature strongly, as energy major E.ON demonstrated this week, some of them said.

With investors desperate for any sort of returns in an environment where almost the entire German government bond curve is in negative-yielding territory, and with the European Central Bank widely expected to restart corporate bond purchases, European companies are queuing up to take advantage.

As a result, very few investment banking teams that manage corporate bond issuance are taking vacations this August, with deals already starting to trickle in and more expected even before September rolls in.

“I’m very positive that it’s going to be a good la rentrée this September – the yield and spread level look very attractive for issuers, and they will be keen to get into the market, while we haven’t seen any signs that investor demand is reducing,” said Jean-Marc Mercier, co-head of debt capital markets at HSBC.

“The next six weeks could be quite busy, and we can start seeing deal flow kick off in August already.”

September is traditionally one of the busiest months of the year for corporate bond issuance. In recent years, super-charged by European Central Bank stimulus, issuance has started as early as mid-August as companies pile in to get deals done.

German energy company E.ON has kicked off proceedings this week with a 1.5 billion euro ($1.7 billion) bond transaction which included a negative-yielding five-year issue. Elsewhere Danske Bank and Belfius Bank demonstrated the depth of demand for Europe Inc., raising 1.75 billion euros between them.

American industrial conglomerate Danaher Corp. is also on the slate for return to euro bond markets, and is expected to lead a group of “reverse Yankee” issuers as foreign companies are drawn to Europe by the low yields on offer.

Other bankers said well-rated and frequent issuers such as Germany’s BMW, Italy’s Enel and the UK’s SSE could all potentially seek to tap the market, though they said they don’t have direct knowledge of those companies’ plans.

“It’s guesswork at this stage as mandates are usually granted only a day or two in advance, but those are the sorts of issuers the market likes to see early,” said a banker who covers corporate debt issuance. He preferred to remain anonymous as he is not authorised to speak about his clients.

Last year, there was 54 billion euros of issuance from corporates (excluding banks) in the Aug. 15-Sept. 31 period, according to Refinitiv data.

A repeat of that this year would take volumes for the year towards the 300 billion euro mark and would set it well on its way to breaking 2017’s record volume of 393 billion euros.

DRAGHI FACTOR

The one potential hurdle is the ECB meeting on Sept. 12; if Europe’s top policymaker Mario Draghi fails to meet market expectations - particularly around corporate bond purchases - it could trigger significant volatility.

But that is all the more reason to start issuance early, said the bankers.

“Expect deals to kick off next week, and expect negative-yielding issuance,” said a third banker who covers corporate bond markets, also asking not to be named.

“Investors see the high quality corporate names as safe places to put their money, and holding cash right now is extremely painful,” he said.

Some data providers such as Tradeweb - an electronic platform for bond trading - suggest that over a third of all corporate bonds in Europe are negative-yielding, while Markit’s iBoxx index of euro corporate bonds shows that the average yield of the sector is almost down to 0.40%.

Yet, even though some investors baulk at negative yields - as E.ON found out on Wednesday, with demand for the five-year dropping - generally speaking they have little choice but to take the pain of lower yields.

“For us there is no doubt that we are in a lower (rates) for longer environment with the ongoing trade discussions between the U.S. and China hanging over the global economy and Brexit coming up,” said Leslie Sita, a client portfolio manager at Lombard Odier Investment Managers. “Since the financial crisis, central bank action has been the biggest driver of markets and I can’t see that changing.”

Indeed, even though European corporate bonds are at record low yields, they have never been more in demand.

Refinitiv data shows that euro corporate bond funds had their best inflows in over three years in June, taking assets under management to a record high of 124.6 billion euros. ($1 = 0.9008 euros)

Reporting by Abhinav Ramnarayan; Editing by Rachel Armstrong and Hugh Lawson

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