Efforts to enhance the performance of Europe’s bond markets in the drive towards the Capital Markets Union (CMU) should not lead to worsened conditions for corporate issuers, says a major treasurers’ trade group.
In its response to the European Commission’s mid-term review of the CMU initiative, the European Association of Corporate Treasurers (EACT) highlights “the push by certain market participants for further harmonisation of issuance” as a potential problem.
“While harmonisation may bring benefits to certain market participants,” says the EACT, “we are against any developments that would make bond issuance disconnected from issuers’ underlying funding requirements, which are not susceptible to harmonisation.
“Such developments would go completely against the very objectives of the CMU of diversifying companies’ funding sources and facilitating capital market access, and would make funding by capital markets more inflexible – possibly deterring issuance.”
The EACT points out that, in general, “the current situation with market liquidity is not a major source of concern for corporates. Typically corporates have not experienced liquidity issues in the primary issuance market”.
It adds: “There are mixed views as to whether secondary market liquidity has, in fact, deteriorated [for more on that question, read this story from March], but even if secondary market activity is thin at times, this has generally not impacted on corporates’ ability to understand pricing dynamics and issue in size if necessary.”
The EACT further notes that the secondary market “is partly less liquid by design due to buy-and-hold investors, which are favoured by many corporates”.
The organisation is prepared to back only a very restricted form of harmonisation. “We would support standardisation of documentation,” it says, “but we strongly oppose standardisation of issuance conditions, sizes, maturity dates or similar.
“Harmonisation would dramatically reduce corporates’ flexibility to fund when required, in line with their business needs and cash-flow cycles.
“Issuance window opportunities are already limited due to various factors – eg, ‘closed periods’ before results announcements, market ‘holidays’ (such as August in Europe), availability of internal resource, time taken to prepare issues etc – and cannot be further limited.”
Standardising issuance timing or size, the EACT stresses, “could prove very counterproductive by creating liquidity problems for issuing corporates and by impacting pricing competitiveness”.
“Underlying business flows can take place on any day of the year and are variable in volume – therefore standardising will impair companies’ ability to match bond issuance with their funding needs.”
Moreover, it adds, “standardisation might in effect lead to worsened liquidity and saturation of the market if issuers are forced to issue on the same dates”.