March 27, 2009 / 12:04 AM / 10 years ago

Bonds to keep star role in company fundraisings

* Q1 sees $331.7 bln raised globally via corporate bonds

* Q1 global syndicated loans total $310.9 bln, down 53 pct

* Q1 global IPO issuance hits 11-yr low of $1.3 bln

By Jane Merriman

LONDON, March 27 (Reuters) - Investor appetite for corporate bonds combined with companies’ need for cash are likely to sustain a flow of new bond issues into the second quarter after all-time record volumes in the first.

Companies raised $331.7 billion globally in the first quarter of this year, the largest total ever of quarterly activity, Thomson Reuters data showed on Friday.

“Investors have decided corporate bonds are probably the best bet at this stage in the cycle versus very volatile equities and gilts (government bonds) with very low rates,” said Ben Bennett, credit strategist at Legal & General Investment Management.

“I think it will carry on like that because companies are motivated right now to raise long-term financing and not to be at the whim of money markets or banks who have historically provided financing,” he said.

“That’s not going to change in the next three months or so.”

Companies usually turn to bank loans and the money markets for ready cash, but these sources have virtually dried up because of the credit crisis.

Global syndicated loans, for example, totalled $310.9 billion in the first quarter, a 53 percent fall in activity from the first quarter of last year, Thomson Reuters data showed.

Corporate bond markets have filled this funding gap for high quality companies that are less vulnerable to recession.

In Europe, telecoms, utilities and energy companies — so-called non-cyclicals — are among those who have taken advantage of the investors’ receptive mood.

There are worries though that if higher-risk companies try to tap the bond markets this could test investors’ enthusiasm.

“There is a funnel driving institutional and retail money into the bond market,” said Christopher Marks, head of debt capital markets at BNP Paribas.

“But as you start to try a variety of names that are more vulnerable to the vagaries of the economy, you wonder if we are ignoring the credit rating agencies’ warnings that defaults are coming,” he said.

SHAREHOLDERS

The alternative to raising debt — sell shares — is markedly less popular. Companies globally raised $61.4 billion in the equity capital markets (ECM) the first three months, the lowest level in almost seven years.

The sharp drop in activity, down 62 percent from a year ago, was largely due to the lack of initial public offerings (IPO) as investors deserted the primary market.

Global IPO issuance registered an 11 year low, with just $1.3 billion raised in the first quarter.

“The IPO market will remain largely shut for the year. Perhaps will see activity again towards the end of the year,” a London-based banker said. Bankers expect follow-on issuance to dominate the ECM activities as companies such as Swiss miner Xstrata XTA.L and global bank HSBC (HSBA.L)(0005.HK) turn to their shareholders for funds to shore up their balance sheets.

OPPORTUNISTIC M&A

Investors have also been happy to fund M&A from certain sectors, where financially strong companies have taken advantage of depressed equity markets to pounce on rivals.

The largest global corporate bond issue so far in 2009 was pharmaceutical company Roche’s ROG.VX $16.3 billion bond in the United States to help fund a $47 billion takeover of rival Genentech DNA.N.

Swiss based Roche also raised $14 billion in the euro and sterling bond markets for the deal, which was the second biggest issue globally in the year to date, Thomson Reuters data showed.

U.S. healthcare company Pfizer (PFE.N) raised $13.5 billion via a five-part bond to pay for its $68 billion purchase of competitor Wyeth WYE.N

The bond bonanza has helped boost fees for investment banks, where fees overall plunged by 50 percent globally from the first quarter of last year.

Debt capital market fees made up more than 40 percent of the total this year, up from 18.5 percent in first quarter of 2008.

Government guaranteed bonds to help shore up fragile banks has become a new category in the corporate bond markets.

Deals backed by the United States government accounted for 40 percent of the total global issuance in this area, followed by the UK and then France. (Additional reporting by Daisy Ku; Editing by Andrew Macdonald) (For related data, click on [ID:nLQ488686])

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