How low can NIPs go?

Fri May 30, 2014 9:01am EDT

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* Premiums for new issues grind tighter

* Investors complain about lack of value

* Corporate bond market unlikely to change until central banks act

By Charlie Thomas

LONDON, May 30 (IFR) - Low single-digit new issue premiums (NIPs) on corporate deals could be the 'new normal' for corporate paper, at least until the end of the year, according to European syndicate bankers.

The unrelenting number of issuers pricing new offerings within their secondary curves has led market observers to question how much more investors are willing to take before they push back.

"We have to be combative and fight for the interests of the people whose money we're managing, which can be difficult when too many investors are queuing for paper," explained Georg Grodzki of Legal & General Investment Management's fixed income unit.

This year, the average new issue premium on corporate transactions (excluding hybrid deals) has been 4.6bp, according to IFR data.

Extremely low NIPs are the latest example of the influence of investors' hunt for yield in the bond market, raising fears of a bubble forming and that investors will regret their current exuberance.

Even during the market sell-off in the middle of May, corporates were able to keep NIPs below 10bp, and last week's issues saw a return to the low single digits - EnBW's 500m June 2026 and Air Liquide's 500m 10-year bond both offered a pick-up of just 2bp.

IFR data showed the average corporate issue NIP to be 6.8bp for 2013 and almost 17bp in 2012, prior to Mario Draghi calming markets by promising to do "whatever it takes".

While there have been no 'normal' markets since 2007, syndicate bankers agree that during reasonable periods, such as between late 2010 and April 2011, NIPs were 5bp-10bp - meaning today's average of 4.6bp looks a little tight.

The lack of liquidity in the secondary market and the fact investors have to place money somewhere is to blame, according to market observers.

Philippe Bradshaw, head of corporate syndicate at RBS, explained: "Investors are frustrated when they are trying to buy, say, 10m of a non-frequent issuer on the secondary market and are being forced to pay a massive price, leading many of the larger institutions to come to the primary markets instead."

Investors have to accept that this is a sellers' market, and that issue concession was now all but gone, according to T Rowe Price's European corporate bond manager David Stanley.

"The idea of grabbing a basis points bargain is irrelevant in a market where most new deals are oversubscribed," he added.

BUYERS FIGHT BACK

However, investors told IFR they were not taking the situation lying down.

A record week of issuance earlier in May, combined with weaker-than-expected European GDP and US production figures, had allowed them to take a breather, with the resulting slight widening of new issues shifting the balance back towards buyers.

Alix Stewart, fixed income fund manager at Schroders, said she was actively pushing back or dropping out of deals altogether where she believed them to be too expensive.

Nevertheless, investors remain wedded to the corporate sector, even if they do not like the relative value, because they remain far more attractive than government bonds.

Societe Generale research released last week showed investment-grade non-financials that have a duration of around 4.9 years offer almost four times pick-up to what the five-year Bund offers (49bp) and three times what the six-year Bund does (66bp). This compares to less than one-and-a-half times pre-crisis.

Still, investors are pushing hard to pry even a few basis points out of issuers. Some buyers of Carlsberg's 1bn 2.5% May 2024 claimed they successfully rejected attempts to push the new issue spread below 100bp by voicing their concerns about the borrower's exposure to Russia.

Aaron Grehan, fund manager of emerging market debt at Aviva Investors, argued buyers of any deals with Russian exposure had to be given a premium, although he said the Russian risk premium was more elevated for sovereign and domestic corporate spreads than for developed market corporates with Russian exposure.

However, bankers argued the slightly wider pricing of Carlsberg's deal (thought to have offered around 7bp-10bp of NIP) was more to do with the 1bn size and the slightly soggy market conditions that week than any investor revolt over Russia.

SMALL NIPS FOR THE FORESEEABLE

In the coming weeks, bankers estimate that NIPs will remain small, particularly for highly rated issuers looking for less than 1bn. A consensus of between 0bp and 5bp was suggested by bankers IFR spoke to for this sort of trade, with NIPs rising to 5bp-10bp for larger trades or less highly rated deals.

Many also said they were not expecting the typical primary market readjustment that occurs late September after the traditional post summer glut of supply, given the landscape was unlikely to have changed much by then.

"Until central banks actually start to raise rates aggressively, it's difficult to see the healthy dynamics of the corporate bond market changing," said Barclays' head of European sovereign, supranational, agency and corporate syndicate Marco Baldini.

This was echoed by Commerzbank's credit syndicate banker Markus Steilen.

"As long as rates continue to be low, and provided the issuer doesn't need a huge amount of money, you can be pretty skinny on NIPs. Only frequent borrowers might find it tricky to come in flat territory, he said." (Reporting By Charlie Thomas; Editing by Alex Chambers, Philip Wright)

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