Debt capital markets: Credit markets brace themselves for 2012

Making credit market predictions for 2012 is a daunting task, given the way things have panned out this year.

As Euromoney goes to press, there is little sign of any meaningful policy action to stem the sovereign debt crisis in the eurozone, so will 2012 simply mean more of the same?

In SG CIB’s credit strategy outlook for 2012, analysts advise that there is no single, absolute and definitive solution to the crisis, "so stop looking for one". But the markets are unlikely to heed that advice. "You can trade on facts," says Richard Boath, co-head of global finance EMEA at Barclays Capital in London. "If you know what the full story is, then any ups and downs are not as important. People can then have a view on the fundamental direction of travel. For something as important as resolving the eurozone crisis the market needs more clarity to ensure a considered response. If it is possible to fund a practical solution to finally resolve this issue, then the market reaction would be incredibly positive." In the meantime, uncertainty will prevail.

"There is a huge incentive to get as much done as possible in the first half of the year but I don’t know if front loading will be possible next year," says Tim Skeet, managing director DCM EMEA at RBS. "If volumes do not happen early on, then there will be bunching later."

Brutal contraction

The SG analysts forecast a brutal contraction in senior FIG issuance next year, with the slack being taken up by deleveraging, private placements and covered bonds. They expect just €50 billion issuance for the year, down from €121 billion for 2011. Subordinated FIG issuance should fall as well, from €9 billion to €5 billion.

Corporates have been the bright spot of the capital markets this year and that is likely to remain the case for 2012.

"The economic slowdown and recession will be met head on by a corporate sector in the best shape it has been," say the SG analysts. "Less than 2% GDP growth in the US and around 0% in the eurozone would normally instil a lot of fear and caution into the credit markets. Not this time, as non-financial corporates have bolstered the defences and battened down the hatches."

However, just because investment-grade corporates are in good shape does not mean they will need to tap the markets.

SG forecasts investment-grade corporate issuance will dip from €82 billion this year to €70 billion next. With high yield due to fall from €31 billion to €20 billion, this means that 2012 will see the lowest level of corporate supply expected since at least 1999.

"In 2012, we’ll continue to see inaugural corporate issuers entering the capital markets, as access to loans will remain challenging and companies look to diversify their funding options," says Raj Bhattacharyya, head of Western Europe capital markets and treasury solutions at Deutsche Bank. Yet the long-held hope that an M&A uptick will kick-start corporate volumes seems to be on the back burner again for 2012.

"Corporate supply will be similar to this year," says Paul Young, head of European DCM at Citi in London. "Significant moves up or down in supply will be driven by M&A, global growth and its impact on capex. I would expect these things to balance out for a flat year." Corporate redemptions in 2012 will be just €68 billion.

Given that the first half of 2011 in the credit markets was characterized by relative health and optimism, participants are understandably wary of the pitfalls of prediction – particularly given the past six months in the market.

"This year was a tale of two markets: before July and after July. Next year will be driven by the outcomes of the various macro issues at play," predicts Bhattacharyya.

Acute needs

The need for access to the senior unsecured funding market will become acute, as will access to hybrid bank capital as banks start raising capital to meet their 2013 Basle III requirements, but confidence is key.

"Credit investors have very high cash levels," says Giles Hutson, head of EMEA Corporates, DCM at Bank of America Merrill Lynch. "The overall system is not short of liquidity but this liquidity is not finding its way to where it is most needed. Using the banks as the intermediaries, the fund and corporate liquidity needs to be used to get the broader system working again. This will not be easy and requires greater confidence in the macroeconomic backdrop."

The market will be hoping for a definitive policy initiative to kick-start issuance in 2012.

"Some sort of guarantee for the senior unsecured market needs to be considered," says Young. "We are all interested in getting some normality back to the capital markets, but potential guarantors cannot fund themselves. We need something programmatic on a large scale or a definitive plan around the sovereign crisis and the risk of senior bank bail-ins."