Volvo enters Europe’s ‘arrested’ bond markets

Swedish manufacturer Volvo AB surprised investors this week by borrowing 500 million euros – a rare deal in Europe’s dry corporate bond market, which has remained quiet even by benchmarks. standard in the summer.

Investors have placed an order of 3.2 billion euros for the deal, from the truck and bus maker’s funding arm, whose bond deal is one of the few that will hit the market. school in the next few weeks. The amount of European corporate bonds raised so far this year has fallen to the lowest level in nearly 20 years, down 18% year-on-year. According to Refinitiv data, European governments have raised 47 percent less than in the same period last year.

The stock market was even muted. Funds raised from companies entering the stock market for the first time fell 92 percent year-on-year, Refinitiv data shows.

The downturn shows how wobbly markets, the dark economic cloud from Russia and rapidly rising interest rates are all making it more difficult for companies to tap capital markets that are generous sources of capital in the world. many years.

“The primary market has been quite active because of the volatility [and] Snigdha Singh, co-head of European fixed income, currency and commodities trading at Bank of America, said liquidity has been heavily challenged.

Years of low interest rates, exacerbated by the pandemic, have encouraged a flurry of corporate and government debt transactions as executives raise new capital and ramp up existing debt repayment obligations in the coming years. future.

But with energy price shocks and global supply chain problems, the priorities of global central banks have shifted from stimulating inflation to mitigating it. The European Central Bank has halted its decades-long bond-buying program, which has acted as a safety net and comforter for markets since the financial crisis.

The bank has now raised interest rates to zero, ending a decade of negative rates and following the US Federal Reserve in raising borrowing costs.

Column chart of Funds raised through issuance of government debt (billion dollars) showing European governments' funding decline from pandemic highs

As the ECB removed its safety net and a recession broke out across Europe, investors shied away from funding the riskier corners of the market. According to Refinitiv, funds raised from the most undervalued, high-yielding companies are down 79% this year compared to the same period in 2021.

“We had a pretty big pipeline in late spring [but said] “put the pen down,” said Tomas Lundquist, head of European corporate debt capital markets at Citi, adding that “in May and early June, the level of confidence we had to get to that level was. The best price may not be that high”.

Additionally, the rush of the bond market over the past two years of the pandemic has meant that “most companies are out of debt and there is no imminent funding need,” he said.

Volvo’s move is more opportunistic. Lundquist at Citi, which led the deal, said the truckmaker’s timing was “very good” after US inflation data was somewhat more stable than investors feared and the company “reacted”. react very quickly when they see this fascinating moment.”

That underscored bankers’ reliance on central bank policy to underpin activity for the rest of the year. Investors and analysts are trying to navigate an uncertain outlook using new data releases to paint a picture of whether and when inflation will cool and forecast its trajectory. interest rate changes of major central banks.

U.S. inflation rose 8.5% year-on-year in July, a slower pace than June and lower than economists had expected – stoking hopes that the pace of price increase in the world’s largest economy has peaked.

Column chart High Yield Bond Issues (billion USD) shows the riskiest European companies facing debt deal drought

The data has been closely watched by investors looking for clues as to how far the Fed will raise interest rates to curb the rapid pace of price increases.

The market is now “standing a little bit better” than in July, “with some more stability and even some new corporate transactions in Europe,” one banker said. [in August]. There is more optimism.”

The stock market may recover more slowly. Valuations of companies listed on the frenzy of the past two years have been slashed. For example, the price of food delivery service Deliveroo has dropped to around £1.7 billion from more than £5 billion when it listed in London last year. That has upset fund managers.

“Companies have contemplated [listing] Tom Johnson, co-head of European capital markets at Barclays, said.

“After the market crashes, there’s always a little ‘ who wants to be the first to step onto the sidewalk? “Many issuers want to see data points from others first. ”

Debt bankers remain more active and say they are encouraged by the recent rebound in the bond market. Total returns on Europe’s riskiest debt are down nearly 10% this year, but returns have recovered more than 6% since their lows in June, according to ICE Bank of America data. An index that tracks higher-level debt has also recovered more than 5% since the June low.

Bankers hope that a few successful deals can encourage more people to jump in.

Josh Presley, chief executive officer of Credit Suisse, said: “We should not underestimate the herd mentality. “A good deal opens the door for others to follow.”

This article has been revised since publication to reflect that the bond agreement involves Volvo AB, not Volvo Cars.

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