Debt capital market volume hits a new low

The debt markets did not look too bad until the third quarter of 2011, when concern about global growth and fear about the failure of European policy-makers to find a decisive resolution plan for the eurozone crisis brought markets grinding to a halt.

Overall, in the first three quarters of the year, global debt capital market volume was relatively flat when compared with the same period last year, falling by just 4%. Then the third quarter happened. In September, activity fell to its lowest monthly level since February 2008.

In Europe, while nine-month volumes were even just above 2010 levels, the third quarter recorded the lowest deal count since the height of the financial crisis in the final quarter of 2008 and the lowest volume since the third quarter of 2008. For the first time since the inception of the euro, a calendar month (August) failed to record a single euro-denominated corporate bond.

“In the third quarter there was a dramatic crisis of confidence about the eurozone and the resilience of the global economy,” says Martin Egan, global head of primary markets and origination, fixed income, at BNP Paribas. “A lot depends on the decisions that will soon be made about private sector involvement in Greece and the European Financial Stability Fund. The outcome of these discussions will set the tone for the markets globally.”

Deep-rooted problem

In the mid-term, Håkan Wohlin, global head of debt origination at Deutsche Bank, says volatility is not going away and borrowing opportunities will be much more difficult.

“The sovereign debt problems in the eurozone [and the economy] have been 10 years in the making and it is going to take a long time to work out, so unfortunately we are going to have to live with this volatility for some time. Borrowers should take advantage of windows of opportunity when new issues can be priced at attractive levels; in some cases there will be elevated borrowing costs for borrowers over the medium term,” says Mr Wohlin.

Most market participants argue that jurisdiction remains critical. Almost irrespective of the quality of the credit, if a company is in a jurisdiction that is considered healthy, then it is likely to have access to capital markets; if it is in a jurisdiction that appears challenged, then opportunities are limited.

Amid ongoing concern about the impact of the European sovereign crisis on banks, global financial institutions group (FIG) volume was the lowest first nine-month period since 2003, and third-quarter volumes were down by 59% on the third quarter in 2010.

European FIG issuance stood at $424bn in the first nine months of the year, down 24% on the same period last year. Again, the third quarter was appalling, with volume the lowest on record. Unsurprisingly, covered bond issuance hit a record of $351.6bn in the first nine months, with European firms accounting for 94% of volume.

Looking ahead

At the end of September, Deutsche Bank reopened the market for senior unsecured bank debt after a record drought of almost three months without a benchmark deal. The German bank sold €1.5bn-worth of two-year floating-rate notes at a yield of 98 basis points (bps) more than the three-month euro interbank offered rate. That is more than the approximately 40bps premium Deutsche paid to issue two-year securities in February, demonstrating the tough environment for Europe’s banks.

Many hoped that the issue would help to pave the way for other financial institutions to raise funds but it is clear that for some, access to funding will remain prohibitively expensive. “Currently, there are still large numbers of banks that will find it hard to access the senior unsecured markets at a sensible price,” says Mr Egan.

Market participants say two things need to happen to restore confidence and reboot the FIG market: regulators need to decide how they are going to stress test the banks, and then to set the right capital level. “If the public sector defines the stress tests and calibrates the capital targets correctly in a balanced way, then we could have quite a good pipeline of financial institution transactions in the fourth quarter,” says Mr Wohlin.

Despite the scale of the challenges faced by European policy-makers both to resolve the immediate crisis and create a better framework for the long-term future of the eurozone, Mr Wohlin says that in the long term he is very optimistic. 

“First of all, banks in Europe are generally well capitalised and those that are not can be capitalised. More importantly, everybody in the public sector is [pulling in] the right direction; they are aiming for further political integration coupled with tightening fiscal discipline both in and out of the eurozone. I can see a scenario where in two to three years, the eurozone will have a fundamentally sounder fiscal and political architecture. Separately, if you look at the combined debt to gross domestic product of all 17 members in the eurozone, it’s not bad when comparisons are made with other peers.”