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| EU
corporate issuance is waning, says S&P
news |
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Our
Markets Bureau
24 June 2002 |
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EU
corporate issuance is waning, says S&P
Our
Markets Bureau
24 June 2002
London:
Issuance volumes in the European Union (EU) have been
lacklustre so far this year, belying expectations that bond
issuance would remain healthy in the first half of the year
as long as interest rates were on hold, says Standard and
Poors (S&P).
 A
reduced flow of refinancing activity related to mergers
and acquisitions is partly responsible for the slowdown
from the record levels recorded in the past two years.
In the period between 1 January-14 June 2002, total issuance
of $308.8 billion was recorded, comprising 1,418 issues. Issuance
volume is running 12.6 per cent below last years levels
in the five months completed to date. However, the
number of issues is running 22 per cent above the corresponding
period a year earlier, suggesting that a number of small
firms continued to come to market even as last years jumbo
issuers, notably from the telecommunications and automobile
sectors, curbed bond issuance.
"Notwithstanding the drop in volume, the increase in
the number of issuers provides evidence of ongoing disintermediation
and diversification in the European issuer base," says
S&P head (global fixed income research) Diane Vazza.
The decline in issuance volume in the European Union (EU)
no longer appears limited to the beleaguered telecommunications
sector; however, the biggest declines are still among telecommunications
issuers, where volumes have dropped 76 per cent compared
with a year ago, says the study.
Other prominent issuers notably banks and industrials
also recorded year-over-year declines in issuance volumes
of 7 per cent and 13 per cent, respectively.
Non-banking financial institutions and utilities were the
only sectors showing increases of 36 per cent and 54 per
cent, respectively, albeit from a relatively low base of
issuance. Increased volume of issuance by utilities was
driven by a recent spate of merger-and-acquisition activity,
whereas rising issuance among non-bank financial institutions
was driven in part by buoyancy in consumer finance lending
as well as in auto and equipment leasing.
By nation, the top issuers were Germany ($89.7 billion),
the Netherlands ($46.1 billion), the United Kingdom ($45.2
billion), and France ($38.5 billion).
As was seen in the first quarter, higher-rated firms have
been more successful at raising funds in the bond market.
This is not surprising, given investor risk aversion and
concerns about creditworthiness. It also attests to
the fact that top-rated EU firms have been less affected
by concerns about headline risk swirling around in the
US. The volume floated by AAA-rated issuers as a share
of total rated volume increased to 32 per cent in the
first five months of 2002 compared with 29 per cent a year
earlier.
Similarly, the proportion of issuers in the A range (i.e.
A+, A, A-) dropped considerably to 29 per cent of total
rated volume compared with 43.5 per cent a year earlier.
The increased migration of issuers from the A range to the
AA range this year reflects increased issuance by banks
and utility companies rated in the AA range this year, which
supplanted issuance by manufacturing and telecommunications
issuers rated in the A range in the corresponding period
a year earlier, says S&P.
Meanwhile, the yield spread between longer-dated and shorter-dated
bonds remains constrained, reflecting moderate inflation
expectations. The yield spread between 10-year swaps
and the one-year swap had narrowed to 132 basis points on
13 June compared with 183 basis points at the start of the
year.
Nonetheless, European firms have not responded with much
gusto to the moderate interest-rate environment.
"There has been opportunistic issuance by some firms,
but many others are remaining on the sidelines until earnings
and profitability pick up materially. Fundamental indicators
such as capacity utilisation, industrial confidence and
new orders have started to show uplifting signs compared
with the early part of the year, but still remain well below
levels associated with healthier profitability," says
Vazza.
According to S&P the prospects for the remainder of
the year look downbeat. The European Central Bank is
expected to raise interest rates in the second half of the
year, thereby narrowing the window of opportunity firms
have had for opportunistic issuance.
A convincing recovery in capital spending could partially
compensate for this dampening effect, but has yet to materialise
in tangible terms as seen in the negative trend in the EU
quarterly fixed capital formation that has been in place
since the third quarter of 2001.
The
risk of higher oil prices as well as concerns about pay
increases outstripping labour productivity could tarnish
expectations for an impending recovery in business investment.
Moreover, the high level of ratings downgrades suggests
that a number of European corporations have already borrowed
in excess of optimal levels and are therefore apt to have
reduced appetite for further borrowing in the months ahead.
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