Cash-rich European corporates unfazed by 2014 maturity wall
* EUR140bn-worth of corporate bonds due to mature next year
* Modest fees likely due to strong corporate cash coffers
* Wider financing options also likely to cap bond supply
By Josie Cox
LONDON, Aug 30 (IFR) - Corporates may be facing their biggest redemption wall in over a decade in 2014, but bankers hoping that a refinancing scramble will result in bumper fees will likely be disappointed as cash reserves should suffice to service most of the maturities.
Approximately EUR140bn of investment-grade corporate bonds, many issued in 2009 at much more expensive interest costs than currently available, are due to mature next year, according to Thomson Reuters data. That represents a redemption increase of 11% on 2013 levels and almost 50% on 2012 volumes.
But while this might have translated into a supply and fee boom some years ago, prolonged volatility has meant that companies have stockpiled cash and are now able to use it to buy back high-coupon debt without having to tap markets.
"Obviously, corporates will not want their cash piles to evaporate entirely, but our modelling suggests a significant portion of maturing debt can be met from existing cash resources," said Duncan Warwick-Champion, head of corporate research at ECM Asset Management.
As a result, total annual primary supply volumes will likely remain a far cry from the highs of 2009, when corporates rushed to regain market access in the wake of the financial crisis that crippled capital markets.
Over that period, four years ago, EUR270bn of high-grade corporate bonds were priced in the currency - an all-time record and more than double what was issued during the previous year.
This year, however, supply has fallen to approximately EUR120bn, down more than 40% on that period, which may suggest that corporates are confident they have enough cash to manage upcoming maturities.
Volumes are slightly up on like-for-like 2012 numbers, which may also reflect pre-funding during the first six months of the year.
Backing this up, European corporate DCM fees were up around 16% during the first half of 2013 over the first half of 2012, also suggesting that many corporates that have to raise money have done so already.
"There are plenty of reasons why corporates needing money would already have come to the markets," one London-based credit analyst said, especially as there are several headwinds on the horizon that point to funding costs rising.
"Predominately, of course, the prospect of rates rising if the US Federal Reserve tapers stimulus."
Another factor diminishing the chances of another record for bonds, is that more funding avenues are now open to many corporates than have been for the last few years.
"Corporates are regaining access to the loan market, so not all the debt necessarily has to be refinanced through bonds in the euro market," said Philippe Bradshaw, head of Europe corporate syndicate at RBS.
Just this week, for example, Amgen announced that it would fund its USD10.4bln acquisition of Onyx with USD8.1bn-worth of loans. And in Europe, French engineering firm Schneider Electric, said earlier this month that it would fund its GBP3.9bn acquisition of Invensys with GBP2.56bn of loans.
Larger institutions also have access to a whole host of different currencies, so supply is unlikely to be concentrated in euros unless there is a specific need for it.
In addition, treasurers are likely to spread out their financing plans over time rather than cram the market in order to help optimise their funding costs.
"While some prefer to keep cost of carry to a minimum and not refinance until just months before maturities, others are still very conscious that issuance windows can open and close very quickly, so are keen to access as soon as they can," Bradshaw said.
MARGINAL PRICING PRESSURE
These factors all serve to quash predictions by some syndicate bankers that the maturity wall could trigger a wave of supply and even drive up funding costs and new issue premiums.
Before the summer break, companies were generally paying single-digit premiums, and even though some bankers have said concessions could creep up to 20bp or 25bp if supply picks up, yields would still be very low on a historical basis.
On Wednesday, BMW printed a EUR700m September 2020 bond at mid-swaps plus 35bp, offering a coupon of just 2%. In contrast, at the end of 2008, the German auto company, rated A2/A, printed a five-year deal that matures at the end of this year and pays a staggering coupon of 8.875%.
"Yes, we may see concessions rise if supply is heavy, but on an absolute basis funding conditions will still be attractive," said Bradshaw.
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