Off the critical list, but still limping

It is not quite business as usual in the corporate segment of the debt capital markets, but it is a great improvement on August.

Corporates were the innocent victims of this summer’s credit crisis. The engine of the world economy continued to turn at much the same speed and real life companies remained in pretty good shape. Yet as subprime mortgage toxins began to seep out of the opaque world of structured products, corporate bonds were tainted along with other forms of capital market debt.

In Europe, the corporate issue market closed down completely from mid-July until the beginning of September. Deal flows are normally subdued at that time of year, when Europe disappears on

its collective summer holidays, but this year the inactivity was complete as initial risk fears morphed into liquidity concerns. “It became a crisis of confidence in the ability to get liquidity, and it affected all asset classes,” says Francois Bleines, Deutsche Bank’s head of corporate syndicate.

Market shutdown

Unable to pinpoint who was sitting on the worst risks, the banks went into a state of paralysis. Other investors, forced to revise their perceptions of value and risk, simply chose to sit on their hands, particularly as the holiday season was upon them.

In the US, by contrast, the market picked up much more quickly after a brief lull and saw a record $90bn in corporate debt issuance during August alone – though at much wider prices. Some say that was because the US market is more experienced, more savvy when it comes to taking on risk. Another likely reason was that its investor base is more concentrated than that in Europe. “In the US you can go to five investors and get $1bn worth of orders to anchor a deal,” observes Michael Ridley, head of global DCM syndicate at JPMorgan. “In Europe, the investor base is more fragmented.”

Early birds

The first investment grade corporate to pop its head above the European parapet was AstraZeneca – and it did not get it shot off. Quite the reverse. To refinance its $15.2bn acquisition of Medimmune, AstraZeneca had sold (expensively) $6.9bn in multi-tranche bonds in the US during the first week of September. A week later it reopened the European market with a seven-year €750m issue, carrying a coupon of 5.125% and led by Citigroup, Deutsche Bank and HSBC. The deal was priced after two hours, attracting nearly €2.5bn of orders.

While prompting widespread relief that the market was stirring once more, the transaction was notable for the generosity of its pricing – at 70 basis points (bps) over mid swaps, though this tightened in secondary trading. That was a combination of a new issue premium and an acknowledgement of market conditions. Had it chosen to raise more, it would have had to add another premium for volume, as it was obliged to in the US. Only a few months earlier, it might reasonably have expected to price closer to 20bps over. This was the shape of things to come.

“The AstraZeneca issue was helpful,” notes Allegra Berman, UBS co-head of European DCM corporate coverage. “Someone in Europe had put a price out there and others could see the premium required to come to market. But a lot of the market was so shocked by the size of it that there was a momentary standstill.”

“We have seen much more intraday execution, US-style, where a deal is announced and priced in a day,” says Andrew Jones, managing director UK syndicate at Barclays Capital.The idea is to get the deal done before something unexpected turns up to wreck it. “We have seen significant volatility in rates and credit in the past few weeks and months, and the way in which investors and journalists interpret the headlines can make or break a deal,” says Mr Jones.

But there will be no quick return to the status quo ante. “The new issue premium will be there for a long time to come,” predicts Eirik Winter, Citigroup’s co-head of EMEA fixed income capital markets. “The price for credit and the price for liquidity have gone up, and not just in leveraged loans.”