Few could have predicted the start that debt capital markets have made to 2012, with the European Central Bank's long-term refinancing operation breathing new life into the sector, providing a bonanza for sovereigns, corporates and high yield alike. However, the continuing problems within the eurozone still cast a shadow over the markets.

What a difference a long-term refinancing operation (LTRO) makes. In the second half of last year, debt capital markets (DCM) activity dropped to its lowest level since the second half of 2008. Aside from a few notable high spots, including AsiaPacific (up 18%) and corporate investment grade (up 12%), the arrows pointed down for total year volumes across most products: US-marketed DCM was down 12%; global financial institution group (FIG) volume down 13%.

After the European Central Bank's LTRO at the end of December, however, everything changed. Senior unsecured bank funding, virtually dead in the second half of 2011 as the eurozone crisis continued to drain the markets' confidence, got off to a good start in 2012. Year-to-date, the sector chalked up more volume in fewer than seven weeks than in the entire second half of last year.

By taking liquidity fears off the table, the LTRO put a bid on risk assets in Europe, unlocking investor appetite – and not just for bank debt. Sentiment towards sovereigns and corporates in the eurozone periphery has become noticeably more welcoming.

Corporate appetite

Appetite for corporates in the periphery has experienced a particular uptick. Spanish oil and gas group Repsol easily got away a €750m issue on January 12 when deals from peripheral corporates were a rarity. Since then, however, a host of others have followed, including Italian energy company Eni, which sold a €1bn bond on January 27 that generated €11bn of demand.

There is definitely a lot of refinancing coming up, but there will be a division between those who can and those who can't get transactions done

Paul Young

Telefónica's €1.5bn, six-year offering on February 10 demonstrated that oversubscription and tightening of price guidance have become the norm. Bookrunners Citigroup, Mizuho, Royal Bank of Scotland, Santander and UniCredit started price talk at 310 basis points (bps) over mid-swaps, cut this to between 300bps and 305bps, and then priced the bond at the tight end, with a book of about €10bn from a startling 600 investors.

Paul Young, head of European DCM at Citi, says everyone underestimated what a catalyst the ECB's LTRO would be for the broader markets. “[Investors] were underweight peripherals as much as financials, and the LTRO has given them the confidence to put money in these sectors,” he says.

Crucially, a growing number of landlocked borrowers, without the large foreign revenues enjoyed by companies such as Repsol and Eni, have also made successful forays into the market.

At the investment grade end, Italian toll roads group Atlantia (led by BNP Paribas, Goldman Sachs, JPMorgan, Mediobanca, RBS, Santander and UniCredit) was the first peripheral deal to offer almost pure Italy risk, with about 85% of its revenues earned in Italy. Altantia's seven-year bond built a €9bn book across 550 investors, for a €1bn deal at the beginning of February.

High yield, high demand

High yield has not missed out on the bonanza. With secondary markets edging higher, a number of high-yield companies have rushed to an eager new issue market: nine issuers priced euro high-yield bonds in the first six weeks totalling €4.4bn.

Grupo Corporativo Ono, the Spanish cable TV group, upsized its bond from $400m to $1bn because of voracious demand. This, too, was priced at the tight end of guidance, at 9.5%. The deal was led by JPMorgan, BNP Paribas and Deutsche Bank, alongside BBVA, Bank of America-Merrill Lynch, Crédit Agricole, Goldman Sachs, ING, Morgan Stanley, Natixis, Santander and Société Générale.

According to credit research from JPMorgan, European high-yield funds saw inflows of €154m in the week up to February 8, raising the level of inflows over the previous four weeks to €469m, representing 5% of assets under management. Global high-yield funds posted their second highest weekly inflow on record, according to US data provider EPFR Global, which recorded $3.5bn of inflows in the same period.

Mr Young believes high-yield activity will continue but getting deals done at attractive levels will be more difficult for some than others. “There is definitely a lot of refinancing coming up, but there will be a division between those who can and those who can't get transactions done. We've seen yields come down a bit but it will still be rather expensive for some. Net-net, I expect quite a lot of activity because there are a number of leveraged buy-out funds that have a lot of money to put to work,” he says.

There are still problems ahead. Global growth fears remain, as well as Greece's ongoing problems in the eurozone. At the time of writing, a further austerity package had been agreed but faced violent protests in the country. How the Greek situation is handled, and whether or not there will be contagion to other peripheral countries, will be crucial to the maintenance of more positive market sentiment.

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