20 February 2013
A recent article in the financial press has highlighted an oddity in the way current UK corporate bond markets are behaving.
On the one hand, cross-currency swaps are expensive and the pricing power of the largest sterling investors is keeping spreads wide but constraining supply; on the other, investment strategists are suggesting that the relative credit play is selling Euro-denominated non-financial corporate bonds and buying sterling ones. Expectations therefore are that there will be a 35-40% decline on last year's sterling issuance figure. To be fair, there’s also an expectation that the Euro-denominated corporate markets will also see a reduced volume in 2013.
Years come and go of course, but the old line about the UK having a buyers markets for corporate bonds seems a bit déjà vu for this old player in the sterling bond markets but what does it mean for potential borrowers?
Is the burgeoning retail bond market on the LSE’s ORB the answer? Unlikely I think, at least for investment grade borrowers; the market is, in my view, better suited to newer entrants. Is a nascent UKPP market about to spring into existence? Again, despite the efforts being made by the ACT amongst others, this is a long haul. Will the convertible market finally achieve its long-awaited breakthrough? Possibly but I won’t bet with my money!
Or, more interestingly, is it a reflection that investment-grade UK corporates have such substantial cash balances that they just don’t need the money? That raises lots of issues too. Who will blink first? What will corporates spend the money on? How big is the corporate mattress?
The ACT’s general mantra over the years has been ‘fund early, fund often and fund long’. Perhaps everyone has done that - perhaps with half an eye on the regulatory tidal wave coming across the horizon - and, well, doesn’t need to for a while? I’d be interested in your thoughts.
By Peter Matza