16 Sep 2020: The year of corporate fixed income
The current context of low interest rates, the search for alternatives with profitability on the part of investors and the fall of credit given by the banks since the financial crisis, have caused an increase, in recent years, in the financing of companies via the capital market. This is the topic we will talk in the following post, where we intend to give prominence to corporate debt issues, which as we will see have increased in recent times.
In times of uncertainty, what an investor is looking for is security. As we have commented in some of our recent articles, the Covid19 crisis has increased volatility in the financial markets, especially the stock market. At the same time, central banks have injected liquidity into the debt market, which has favored a (further) lowering of interest rates, reducing the profitable investment opportunities for investors in the bond market. In other words, the rapid reaction of central banks to guarantee the necessary financial stability and the availability of credit to fight the impact of coronavirus has resulted in a consequent cut in interest rates. In turn, this has led to many companies and governments continuing to borrow at cheap prices[1], and as a result, corporate bonds have regained strength.
For all these reasons, there is no doubt that the investor’s appetite for these types of assets has increased, since it is now seeking to invest in assets with guarantees and, if possible, with positive returns that are known in advance. The investor aims precisely to mitigate the uncertainty in the stock markets, achieving a total uncorrelated and greater diversification in their portfolios.
Most industry experts agree that demand for corporate fixed income assets is expected to remain strong throughout 2020. And the fact that most of the offer in the public fixed income market is with negative yields can lead investors to take more risk to increase their returns, being forced to buy corporate debt as “investment grade” or “high yield”.
One of the risks to the investor of this type of asset may be the lack of ability of the issuing companies to refinance their debt if interest rates and inflation increase, in a scenario of economic and financial deterioration. But the current situation of zero interest rates and expansionary monetary policy of central banks means that a context of low rates is expected for a long time, and for that the increase in financing costs is less likely, and therefore these investments are less risky.
But how has the corporate bond sector evolved in recent months?
A study published in the World Bank highlights that 40% of total emissions between 2009 and 2016[2] were made outside Spain by Dutch, Irish, and especially Luxembourg financial vehicles, as is the case of Laurion Group at present, which will issue its debt program in the last quarter of the year, from its Luxembourg investment vehicle Laurion Alternative Deposits.
In the same way that after the financial crisis, since the end of 2019 there has been an increase in issues by companies, although with significant differences. And, when it started last year, nobody expected a rally like the one experienced in the bond market: the yield on sovereign and investment-grade corporate bonds fell to record lows and companies took advantage of this to accelerate the pace of their new issues. Specifically, according to data collected by Société Générale, “[…] in the first 8 months of 2019, 226 billion were placed in non-financial corporate debt with investment grade in euros, which represented a 35% increase over the figure for the same period of 2018, and the highest record in the historical series”.[3]
And “according to an OECD report, the volume of corporate debt reached a record high […] of 13.5 trillion dollars at the end of 2019. […] Also, in the coming years the secondary market of corporate debt will experience a great growth, especially in Spain (more than 19,000 MM euros in the next 2 years)”.[4]
By 2020, corporate debt issues have continued to grow. In a pandemic environment like this, despite the challenging environment and uncertainty in the markets, many companies have issued debt to get enough oxygen to continue to grow and ensure their survival.
In addition, according to Aseafi[5], the banks are currently focusing on helping private clients to clean up balance sheets, leaving out SMEs and self-employed and micro-enterprises that until now were financed with their own resources. According to the association, “[…] In 2020, Spanish companies in the Corporate Debt Index issued debt worth 4.4 billion dollars in the bond markets”.[6]
In addition, this year the new issues offer a higher profitability versus the issues that are quoted in the market, due to the good behavior of the debt market throughout 2019 by the increase of prices and consequent reduction of yields, as we have already commented.
2020 is undoubtedly the year of corporate fixed income, and in Laurion we will take the opportunity to be one more in the issuing market, offering our institutional investor a more attractive and profitable alternative with guaranteed capital in times of uncertainty.
[1] “Debt issues resume in Europe with an almost record intensity”, 27 March 2020, https://cincodias.elpais.com/cincodias/2020/03/27/mercados/1585323686_585724.html
[2] STUDY ON THE FINANCING OF SPANISH NON-FINANCIAL COMPANIES IN THE BOND MARKETS, BME Studies and Publications, October 2016
[3] The issuance of investment-grade corporate debt at record levels, ElEconomista, September 2019, https://www.eleconomista.es/mercados-cotizaciones/noticias/10066641/09/19/La-emision-de-deuda-corporativa-con-grado-de-inversion-en-niveles-record.html
[4] In what situation is the global corporate debt market? , ASEAFI, July 2020, https://www.aseafi.es/en-que-situacion-se-encuentra-el-mercado-mundial-de-deuda-corporativa.
[5] In what situation is the global corporate debt market? , ASEAFI, July 2020, https://www.aseafi.es/en-que-situacion-se-encuentra-el-mercado-mundial-de-deuda-corporativa.
[6] In what situation is the global corporate debt market? , ASEAFI, July 2020, https://www.aseafi.es/en-que-situacion-se-encuentra-el-mercado-mundial-de-deuda-corporativa.