The market for corporate bond issues is in a state of flux. The war in Ukraine, rising interest rates, rising inflation and the end of European Central Bank support are prompting investors to exercise caution. Here are 5 signs of the ongoing transformation of the corporate debt market.
1. Rising financing costs
The rise in rates has been accompanied by another phenomenon in recent months: the widening of spreads between eurozone member states, i.e. the difference between interest rates on German 10-year bonds, which serve as a benchmark for the entire European corporate debt market, and interest rates on bonds issued by other countries.
While France's spread remains limited, at 0.2 percentage points over Germany, this is not the case for southern European countries such as Cyprus, Portugal, Italy, Spain and Greece. Investors are demanding much higher interest rates to cope with greater risk, widening the gap with the German rate.
As a result, financing costs have risen by tens to hundreds of millions of euros, affecting all borrowers in varying proportions depending on their credit rating. For an A-rated issuer, the bond coupon rose to 2.25% from 0.5% last October, and for a BBB-rated issuer, the coupon rose to 2.875% from 0.5%.
2. Shorter borrowing periods
More cautious than in the past, investors are no longer willing to take the risk of duration, and are losing interest in long-term bonds. The average maturity of issues is 7.3 years.
Bonds are considered short-term when their life is less than 5 years. Between 5 and 12 years, they are called medium-term bonds. When the maturity is more than 12 years, they are long-term bonds.
There are also very long-term sovereign bonds: in 2019, Argentina borrowed $2.7 billion over 100 years.
3. Partial market opening
Rising interest rates, rising inflation, the war in Ukraine, slowing growth and a host of economic uncertainties have caused investors to retreat, with many of them dumping their stocks since the start of the year.
Although the situation is gradually improving, the corporate debt market is still only partially open, with transactions taking place on only 3 days of the week, compared with 4 or 5 days in a row under normal circumstances.
This is certainly better than in April, when trading was only recorded one day a week, but still insufficient. This phenomenon is explained by the caution of issuers, many of whom want to ensure market stability for at least 48 hours before taking action.
4. Cautious investors
This lack of visibility is prompting investors to exercise caution. Rates may continue to rise, as may spreads and inflation, leading investors to shy away from certain transactions.
This tendency to procrastinate is particularly prevalent in the market for high-yield bonds, which are high-risk, high-yield bonds issued by companies with a low credit rating of BB+ or below.
5. The consequences of the European Central Bank's withdrawal
The European Central Bank has announced its intention to end the Asset Purchase Programme (APP) this summer, a program of asset purchases that has greatly improved corporate financing conditions since 2015.
Although the exact date on which this program will cease has not yet been set, it is expected to take place in the 3rd quarter of 2022, and is already having an impact on the market, notably on spreads.