Last minute issuance rush raises hopes for the final quarter
* Investment-grade issuance slowest since Q2 2012
* Fed decision boosts September numbers
* 2013 floating rate note volumes outpace 2012 by 40%
By Helene Durand
LONDON, Sept 27 (IFR) - Market participants are hoping that the strong primary market volumes in the past weeks will continue until the end of the year, countering a sharp drop in global bond issuance in the third quarter.
According to Thomson Reuters data, investment-grade issuance in the last three months was down 14% to $557.8bn versus Q2, the slowest pace of investment-grade issuance since the second quarter of 2012.
Global debt issuance year-to-date was also down 3% from the first nine months of last year at $1,094bn.
The third quarter started under a cloud as the prospect of the Fed reducing monetary stimulus sent markets reeling at the end of May. This, added to the usual seasonal slowdown, kept a lid on issuance.
"The last five weeks of the second quarter were quite challenging with issuers having to pay substantial new issue premiums. However, the picture has changed. New issue concessions have moderated, and credit investors have enjoyed a very good total return quarter," said Chris Whitman, head of global risk syndicate at Deutsche Bank.
"We are ending the quarter in a very good place. Just like in golf, the view on some holes looking backward from the putting green isn't nearly as onerous as the view from the tee box."
A deluge of investment-grade deals in the U.S. made September the biggest new issuance month ever, with $143.9bn tallied.
A $48.9bn transaction for Verizon, the largest corporate bond since records began, clearly helped boost numbers.
Borrowers, whipped into an issuance frenzy by the Fed's non-taper surprise last week, are now pulling forward deals that were scheduled as far away as next year, fearing this might be the last time they see Treasury yields at current levels.
It remains to be seen whether this continues, however.
"What is noticeable is the lack of issuers available or bridge loans that need to be refinanced in the market more generally," said Jonathan Brown, head of European fixed income syndicate and head of emerging market syndicate at Barclays.
"It feels relatively empty in terms of visible pipeline, including high-yield where most of the refinancings have been done. One bright spot is that there continues to be flow of issuers deciding to pre-fund, especially as they see a future where rates are likely to go higher."
The macro backdrop will also play a part. Brown said the US budget discussion and tapering will be some of the main issues the market is focused on, as well as political events in Italy.
"The main risk in Europe is whether we continue to see growth or whether the last quarter was just a blip," said Jean-Marc Mercier, global head of debt syndicate at HSBC. "However, I don't think we will be staring into the abyss."
September was also a good month for European corporate investment-grade issuance, already over $40bn-equivalent, easily beating July and August combined issuance of around $35bn. Bankers are pinning hopes on a bulging pipeline that new names are joining on an almost daily basis.
"There are borrowers that were thinking of accessing the market next year but are looking at the current conditions and could move forward their issuance plans," added Mercier.
Deutsche's Whitman added that in most sectors, from financials to corporates, spreads are at their tightest year-to-date, while emerging markets spreads were significantly tighter than where they had been at the end of the second quarter.
The iTraxx S19 Main was at 91bp on Friday morning, having ended the second quarter at 119.25bp.
Despite tighter spreads, the issuance picture for banks is not as rosy with year-to-date issuance down 10% from the first nine months of 2012, according to Thomson Reuters.
But capital issuance is expected to accelerate from here as banks seek to replace old style instruments.
Although 10-year US Treasury yields rose from 2.48% to 2.655% in the third quarter, Thomson Reuters data showed that the average investment-grade coupon had fallen to 3.84% during the same period.
It also showed that issuance of floating rate product was up 40% over 2012 with $290bn issued so far in 2013.
Meanwhile, emerging markets began the quarter recovering from the sell-off triggered by tapering fears after the release of the FOMC minutes on May 22, and it was not until July that calmer conditions encouraged a broad mix of issuers to market.
Nigeria, Gazprom, Bahrain, AngloGold and Eskom all raised $1bn-equivalent or bigger trades, though all needed healthy concessions to get their deals away.
Russia's $7bn bond in September was the biggest emerging markets deal of the year, and proved that despite fund outflows, investors have cash to deploy for the right names.
Despite the Fed's decision to hold off tapering for now, there is still plenty of uncertainty in the sector about what the near-term future holds.
"We have seen modest inflows into emerging markets for three weeks in a row after a tough summer for the sector," said Brown. "It's encouraging that with the right new issue premium, deals can get done. There is more of a backlog there and investors' perception is that they can pick and choose a bit more."
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