The summer months saw some signs of distress in the more esoteric corners of the market, notably corporate bonds and convertibles. The immediate problem was, not surprisingly the telecoms sector, where bond yields exploded and convertible prices collapsed. Despite this, an analysis of euro corporate bonds shows them matching bank issues and surging ahead of dollar issuance.
In an occasional paper published by Schroder Salomon Smith Barney, Graham Bishop says that although “All issue” volumes dropped in the second quarter, private corporate issuance in euro surged ahead, and was almost a fifth higher than corresponding dollar volumes. All issuance fell by 12% in the US dollar market and 20% in the Euro, but investors transferred E13bn to the Euro corporate sector compared with E11bn in dollar issues. Despite these drops, issuance of euro-denominated bonds was still up 22% year on year. Although the dollar issuance was swelled by US agency issuance, some E34bn of euro issuance was designed for domestic consumption.
Bishop says that although it is too early to confirm the trend, the euro is unquestionably establishing itself as on par with the dollar as a long-term financing currency. The arrival of the new currency in bank accounts next February may well accelerate that conception. Even so, euro issuance has someway to go to overtake the dollar market, being just one-third the size of the dollar market.
One other point highlighted in the paper is the importance of the bond market to EU investors. Even when restricting a comparison with equities to “investible bonds” the latter market is 10% larger. If all long-term bonds are included investment in equities is dwarfed.
Although the public sector use of the euro issuance system has stagnated, with only two EU countries making issues, the extraordinary performance of the private sector continued. Volumes were up for the second consecutive quarter, and were 110% higher than the same period for the previous year. This meant private corporations raised virtually the same amount of cash as private banks, a significant milestone and of concern to the banking sector.
The telecoms sector was the largest issuing group at E9bn, but Bishop says that the distribution of issues was much broader than in previous quarters, including as it did autos, electronics, industrials and retailers. The geographical breakdown was also encouraging, with all bar two member states involved. The list also spread to North America, but beyond that market, representation was sparse.
The influence of the telecoms sector remains significant, however, funding as it does the enormous borrowing taken on by companies bidding for licences for the new generation of telephones and the remainder of the wireless business. Similarly the auto sector has seen credit deterioration forcing some borrowers to replace short-term borrowing with long-term funding. The euro-denominated high yield market also came under pressure from ailing telecom credits.
Although mergers and acquisitions have been a major driving force corporate bond issuance, Bishop’s paper suggests this is waning this year.