Heightened market volatility from the eurozone sovereign debt crisis is causing the region’s bond issuers to rethink their deal execution strategies, including issuing in alternative currencies, according to senior bankers at Nomura.
Although most European high-grade borrowers are well funded for 2011 – having front-loaded up to 80% of their intended issuance for the year in the first six months – sovereign turbulence has made it difficult to find the optimal issue window.
“The plan of many borrowers to come back in September to do the remaining funding for the year has been challenged due to the worsening macro situation,” says Nick Dent, head of the high-grade debt capital markets syndicate at Nomura. “Issuance windows are particularly tight at the moment: even intraday investors can fall in and out of love with a trade. Before you could allow a full day’s grace for getting a deal done.”
The sovereign debt crisis rumbles on: Greece’s second €109 billion bailout is causing friction between European Union member states. There are calls for more losses to be taken by the private sector, France and the European Central Bank.
In such an environment, issuers have to be ready to move at very short notice, explains Morven Jones, head of corporate and SSA DCM at Nomura.
“We have recommended a change in execution strategy to clients as a result of the volatility,” says Jones. “If you go back to the period immediately following the Lehman crisis, what characterised new issuance and execution was more engagement with investors before formally launching a deal to build up a head of steam of demand. That engagement gave issuers the confidence their deals would be executed successfully. We’re not quite seeing the same level of uncertainty now, but are recommending that level of engagement.”
As well as having more pre-deal dialogue with investors, European borrowers are exploring the possibility of issuing outside euros and US dollars.
Since June, Nomura has arranged samurai deals for the likes of Lloyds TSB, Rabobank, Banque Federative Credit Mutuel and Eksportfinans. While not predicting a glut of samurai issuance in the coming months, Jones argues this option could be attractive for the right names.
“With the recent widening of spreads in Europe, even taking account of the cross-currency swap costs, the yen market is likely to be increasingly competitive,” says Jones. “For corporates that need funding, this is certainly going to be an area we will be focusing on. It would be over dramatising to suggest there will be a big surge of supply, but from a pricing, execution and market stability perspective it looks more attractive than Europe at the moment.”
Borrowers seeking to tap Asian investor interest are looking beyond yen, adds Dent.
“Dollars and euros are not the only game in town anymore for Asian investors,” he says. “There are a lot of conversations about alternative currencies – not just the European alternatives such as Norwegian krone, but currencies such as the Singapore dollar, Indonesian rupiah and Indian rupee. This is partly based on the commodity play, partly the yield play, and is definitely an emergent theme. Whereas before it was all about liquidity and two or three major currencies, now there is demand for alternatives. That is likely to continue.”