Euro woes see institutional investors flock to 'safe havens'

When concerns about the survival of the eurozone peaked last year, the impact spread way beyond the bloc's 17 member states. Institutional investors fled to perceived safe havens, such as US treasuries or UK gilts, where yields reached record lows and even moved into negative territory as investors made clear they were far more concerned about retrieving their capital when loans matured than the returns they would receive in the interim.

Attention focused on treasuries and gilts not because the UK or US economies were attractive per se, but because their governments had more control over their countries’ purse-strings.

Outside the eurozone...

The appeal of sovereigns outside the eurozone has persisted this year. On January 24, the UK tapped the syndicated loan market, looking for 50-year money. Few could have predicted the market’s response to the deal, a £4.75bn ($7.5bn) transaction which attracted orders of almost £12bn.

“It was one of the quickest order books ever. In less than an hour, more than £11bn of orders came in,” says Ulrik Ross, global head of public sector debt capital markets at HSBC.

While the UK may be basking in its status as a safe haven, other sovereigns in Europe have been less fortunate. Central and eastern European (CEE) sovereigns, for example, have been badly hit by the eurozone crisis, particularly as many have come to rely on cash-strapped European banks for credit. Hungary slipped into a critical state last year and investors inferred the entire region would be impacted by the situation in the West.

In 2012, however, appetite for CEE sovereigns reignited. Poland issued a $1bn 10-year transaction in January, attracting almost $5bn of demand. Lithuania launched a $1.5bn deal and received $5bn of orders and Slovakia also raised €1bn in a highly popular transaction.

“I don’t think it would have been possible for Slovakia and Poland to come to the market last year due to the uncertainties of the Greece resolution and volatility. But they are benefiting from the positive tone in the eurozone,” says Zeina Bignier, head of public sector at Société Générale.

For investors, the appeal of these deals has a certain logic. Slovakia, for example, offered a yield of 4.69% on its five-year deal, while Poland paid just over 4.9%. In each case the spread over German bunds was more than 300 basis points.

“CEE sovereigns offer a good yield pick-up so if you believe in the eurozone and if you believe they will join the single currency, you will back these issues,” says Mr Ross.

Emerging growth

Investors are also looking beyond the eurozone for top-flight credit risk, diversifying into sovereigns whose economic situation looks more promising, such as Sweden and Australia. More adventurous institutions are increasingly attracted by emerging markets, many of which are growing fast and seeing their credit ratings improve in consequence. In January, for example, emerging market sovereign and quasi-sovereign issuers tapped the markets for more than $21.7bn, more than five times the $4.1bn in issuance in January 2011.

“If you want to maintain the quality of your portfolio, you need to invest in credits that are stable or improving. Emerging market government bonds have been improving in terms of credit quality. The average rating of emerging market sovereigns has risen from BB in the mid-1990s to BBB- now, which is investment grade,” says Xavier Baraton, global CIO of fixed income at HSBC Global Asset Management.

A reassessment of risk and reward has led to a growing interest in European corporates. Once, these companies would have been considered far less secure investments than any government in the region. Now top names are regarded as more attractive credits than sovereigns. “Demand is extremely high for the right names. There is a lot of money out there,” says Charlie Berman, head of public sector global finance, Europe, the Middle East and Africa, at Barclays Capital.

Brewer SAB Miller, for example, came to market in early January and was able to increase the size of its multi-tranche deal from $4bn to $7bn after attracting an order book of $25bn.

“European corporates have become safe havens. [Italian multinational oil and gas company] Eni’s €1bn, eight-year transaction, for instance, attracted €11bn of orders and came 120 basis points inside Italy,” says Martin Weber, head of sovereigns, supranationals and agencies origination and syndication at Goldman Sachs.

When corporates are able to access funds more cheaply than governments, it says much about the state of the market. In essence, it appears that investors are increasingly assessing borrowers and transactions on a case-by-case basis.

Since the Greek debt crisis began, traditional norms no longer apply because trust in the old order has gone. Good news for fast-growing, developing nations; less welcome for struggling sovereigns.