Calmer conditions prevailing in European debt markets boost primary activity
‘Turbulent’ is a good way to describe the current financial markets. We feel that now is the right time to provide you with the latest insights on the European sovereign markets, primary activity in European debt markets and the financial robustness of financial institutions.
European sovereign issuers
European governments have updated their funding plans in order to secure extensive economic support packages. A large flow of newly issued government bonds has put upward pressure on eurozone yields and sovereign credit default swap (CDS) spreads. The significant rise in Italian and Spanish yields can partially be attributed to supply pressure and uncertainty about the European recovery plan. German, Dutch, and French bond yields have stabilized as investors look for safer assets.
Corporate CDS market
Corporate CDS spreads, together with eurozone interest swap rates, determine benchmark costs for newly issued corporate debt. The euro interest swap curve has decreased and flattened, a trend that started in October 2019. The flattening of the curve can be an indication of the expected and much-debated slowdown of the Eurozone economy. On the back of the introduction of lockdown measures in Europe, costs of insuring debt of European investment grade corporates doubled and CDS spreads of leveraged corporates tripled. In May 2020, CDS spreads decreased again, by more than 30%, to 80 bps for investment grade debt. The leveraged loan CDS spread (B vs BB-) showed a similar pattern, but average spreads remain high at 480 bps.
Debt capital market activity
The rush for liquidity that characterized Eurozone investment grade markets in March 2020 is showing signs of slowing down in May. The search for liquidity has eased as government backed loans take some pressure away from corporates hit by the coronavirus. Relatively calmer conditions have allowed corporates to pick up primary activity in April and May of this year. New bond issuance is dominated by large, well-known issuers and European primary markets are now cautiously reopening for M&A transactions.
Nevertheless, the recent rise in funding costs might affect forthcoming refinancing activity. Financiers can become selective regarding longer tenors or industries that are severely affected by lockdown measures imposed by governments. In industries most affected by lockdown measures, issuers such as ArcelorMittal and Repsol have turned to hybrid instruments to strengthen their capital structures. This approach can be a viable additional line of financial defense and serve as an alternative to a rights issuance amid depressed equity prices. Zanders has organised the webinar ‘Treasury Preparedness in Challenging Times’ in which we show how to strengthen the financial structure of your corporation using different lines of defense. You can find a recording of the webinar here.
It is not only corporates that are impacted by the coronavirus outbreak in Europe. In April 2020, Fitch has taken rating actions for several European and British banks to reflect the downside risks to their credit profiles, resulting from the economic and financial market implications of the coronavirus outbreak. Fitch has, among other actions, placed Long-Term Issuer Ratings to ‘Rating Watch Negative’, noting that banks enter the economic downturn with only moderate rating headroom. Corporate treasurers can compare Tier 1 Capital and Total Capital ratios of (international) banks. Higher ratios imply that banks might have room to provide additional liquidity as balance sheets can be stretched with new deals.
CDS spreads rose the most for banks that entered the coronavirus crisis with the highest credit risk. In March 2020, stabilization was generated by forceful policy measures, which favored the banks with healthier balance sheets. CDS spreads of the riskiest banks continue to increase despite the stabilization phase.
We are pleased to present you with our new Debt Report. Please do not hesitate to contact Zanders Debt Advisory if you want to know your lines of defense and how the debt markets could receive your next financing.
For more information, please contact Willem Six or Lotte Coppelmans via +31 35 692 89 89.