Volvo dips in to Europe’s ‘seized up’ bond markets


Swedish producer Volvo AB stunned traders this week by borrowing €500mn — a uncommon deal in Europe’s parched company bond markets which might be pin-drop quiet even by summertime requirements.

Investors positioned €3.2bn value of orders for the deal, from the financing arm of the truck and bus maker, whose bond deal was one in all only a handful to hit the market in a number of weeks. The quantity raised in European company bonds to date this 12 months has fallen to the bottom stage in practically 20 years, down 18 per cent in contrast to the identical time final 12 months. European governments have raised 47 per cent lower than the identical interval final 12 months, in accordance to Refinitiv knowledge.

Equity markets are much more muted. The quantity raised from firms hitting stock markets for the primary time has plunged by 92 per cent in contrast to final 12 months, Refinitiv knowledge reveals.

The slowdown reveals how wobbly markets, a darkish financial cloud from Russia and quickly rising rates of interest are all making it more durable for firms to faucet markets which were beneficiant sources of funds for years.

“Primary markets have been quite seized up because of the volatility [and] liquidity has been very challenged,” mentioned Snigdha Singh, co-head of European fastened earnings, currencies and commodities buying and selling at Bank of America.

Years of low rates of interest, exacerbated by the coronavirus pandemic, inspired a glut of company and authorities debt offers as executives raised new funds and pushed present debt reimbursement obligations additional in to the long run.

But with power worth shocks and world provide chain points, world central banks’ priorities have shifted from stimulating inflation to hosing it down. The European Central Bank has halted its decade-long bond-buying programme which had acted as a security web and offered consolation to markets because the monetary disaster.

The financial institution has now lifted rates of interest to zero, ending a decade of destructive charges and following the US Federal Reserve in growing borrowing prices.

As the ECB has eliminated its security web and recession looms throughout Europe, traders have shied away from funding riskier corners of the market. The quantity raised by the lowest-rated, high-yield firms has plunged 79 per cent to date this 12 months in contrast to the identical interval in 2021, in accordance to Refinitiv.

“We had a pretty substantial pipeline late spring [but said] ‘let’s put down the pen’,” mentioned Tomas Lundquist, head of European company debt capital markets at Citi, including that “in May and the beginning of June, the confidence level that we had to get the best possible pricing wasn’t that high”.

Additionally, the push of bond market exercise over the previous two pandemic years meant that “most companies had already termed out debt and didn’t have imminent funding needs”, he mentioned.

Volvo’s transfer was extra opportunistic. Lundquist at Citi, which led the deal, mentioned the truckmaker’s timing was “very good” after US inflation knowledge was considerably tamer than traders had feared and that the corporate “reacted very quickly when they saw this attractive window”.

That has underscored bankers’ reliance on central financial institution coverage to underpin exercise for the remainder of the 12 months. Investors and analysts are attempting to navigate the unsure outlook utilizing new knowledge releases, aiming to paint an image of whether or not and when inflation will cool and to forecast the trajectory of main central banks’ rate of interest modifications.

US inflation rose by 8.5 per cent 12 months on 12 months in July, a slower improve in contrast with June and a decrease determine than economists had anticipated — elevating hopes that the tempo of worth rises in the world’s greatest economic system has peaked.

Column chart of High-yield bond issuance ($bn) showing Riskiest European companies face a debt deal drought

The knowledge had been carefully watched by traders trying to find clues about how far the Fed will increase rates of interest to curb speedy worth progress.

Markets really feel “on a slightly firmer footing” now in contrast to July, one banker mentioned, “with some more stability and even some new corporate deals in Europe [in August]. There is more optimism.”

Equity markets could also be slower to rebound. The valuation of firms that listed in the market frenzy over the previous two years have been slashed. For instance, meals supply service Deliveroo’s valuation has plunged to about £1.7bn from greater than £5bn when it listed in London final 12 months. That has postpone fund managers.

“Companies that were contemplating [listing] are taking time to see how things settle, and sellers may also need to adjust valuation expectations,” mentioned Tom Johnson, co-head of European capital markets at Barclays.

“After a market fall there is always a bit of ‘who wants to be the first to step off the pavement?’ A lot of issuers would prefer to see data points from other people first.” 

Debt bankers stay extra optimistic and say they’re inspired by latest bond market rebounds. Total returns from Europe’s riskiest debt is down virtually 10 per cent this 12 months, however returns have recovered by over 6 per cent since a low in June, in accordance to ICE Bank of America knowledge. An index monitoring increased grade debt has additionally recovered by over 5 per cent since a June trough.

Bankers are hopeful that a few profitable offers may encourage extra to soar in.

“We should not underestimate the herd mentality,” mentioned Josh Presley, managing director at Credit Suisse. “One good deal will open the door for others to follow.”

This article has been amended since publication to mirror that the bond deal includes Volvo AB, moderately than Volvo Cars

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