A weekly podcast from GlobalCapital discussing the most interesting stories from the world’s capital markets
Was that the high water mark for bond market madness?
The primary bond market was going gangbusters this week. January is always a busy month but, so far, this one feels busier than others.
Bond markets have run on central bank fuel in the form of low rates and quantitative easing for years. That has led to some startlingly low yields and an era of cheap borrowing. But with rate rises on the way to combat inflation, there is a very real sense that this could be the end of an era.
Amid the flood of new bond issues, issuers are grappling with how to keep lure investors into allowing them to lock in low rates just as the era of cheap money looks set to end. Meanwhile, investors are asking themselves what it would take for them to buy certain bonds that pay what are obviously meagre yields now, let alone how they will compare once rates rise across the board.
All of that has led to some interesting dynamics across the sovereign, supranational and agency, financial institution, corporate high yield and convertible bond markets. The success of some of the deals issued this week looks, at first glance, to be completely counterintuitive, that is until you take a closer look.
On this week’s podcast, we take that closer look to see what is driving bond issuance, whether we witnessing the final throes of the age of cheap money, and how that might affect the rest of the year in the primary capital markets
What the first few days of 2022 tells us about the rest of the year in capital markets
January is invariably one of the busiest months in the capital markets calendar for new issuance as borrowers race to get ahead of their funding plans, and those of their rivals. So far this year, it has been no different with huge volumes of bond funding raised across different markets. But underlying the buoyant conditions is a sense of unease that they might not last forever.
This week, we looked at what is causing that unease — from the spectre of rising interest rates and the tightening of central bank monetary policy, to inflation, to protests in Kazakhstan and what risks they pose to other parts of the emerging markets — and how that will affect borrowers looking to issue debt this year.
We also delve into the latest controversial iteration of Europe’s Taxonomy for sustainable activities and how this might affect the sustainable finance market.
How the ECB set up the primary bond market for a hectic January
This week was an important one for the primary capital markets, even if there was very little, if any, issuance. The US Federal Reserve, the Bank of England and the European Central Bank all made key monetary policy decisions that laid the ground for what is traditionally one of the busiest months for capital raising all year — January — and beyond.
We focus on what the ECB said about its plans for bond buying and how this will impact bond markets at the start of next year, particularly for public sector borrowers. The central bank looks to be winding down its Pandemic Emergency Purchase Programme. Knowing that central bank support for the market is going, public sector issuers, which have been the main beneficiaries of the Pepp, will look to get more funding done than usual at the start of the year before the ECB winds down its buying under the programme in March.
But the ECB is mitigating that withdrawal of support by deploying its firepower in different ways. We discuss what these are, how they will affect the capital markets, and which borrowers will benefit.
Ripping up the IPO rulebook
First the UK and now the EU have embarked upon a review of whether the way IPOs are done on their turf is fit for modern markets or not.
With €93bn-equivalent raised through IPOs so far this year in EMEA — a number only equalled in the last 21 years in 2007 — there seems to be a case for streamlining the way deals are done and making the market cheaper and more accessible.
But IPO volumes vary from year to year — it will not always be this busy. Will the reforms under discussion be beneficial in the long run?
Market participants often hail the way IPOs are conducted in the US because they are perceived to require a lot less work. But does that make for a better market with better outcomes for investors and issuers?
On the podcast this week, we discuss what changes have been made in the UK and the EU, what may lie in store, and what market participants want to see from a reformed market for listings on the eastern side of the Atlantic.
Omicron hits leveraged finance market
A fertile hunting ground for signs of major shocks affecting capital markets is invariably the parts where the worst rated credits are — where risk is deemed to be highest. That typically means the emerging markets and, as was our subject this week, the leveraged finance market where the most indebted companies raise debt capital.
The recently detected Omicron variant of the coronavirus is already having an effect on the latter. Three huge financing deals that have been in the pipeline for months are now quite likely to be shoved into next year because investor confidence has ebbed away.
Typically, banks with huge leveraged finance debt positions to sell don’t like holding on to them over Christmas, but that now looks like it will be the case. On the podcast this week, we examine how they have ended up in this situation and what the consequences are likely to be.
Meanwhile, we also discuss credit investment firm Alcentra, which has been put up for sale by its owner, BNY Mellon.
Unorthodox emerging markets from Bitcoin to the Bosphorus
Turkey has once again defied monetary policy orthodoxy by cutting interest rates in a bid to tackle inflation, which is running at around 20%. The results on the country’s currency, the lira, have not been pretty and it has plummeted in value. But what does that mean for the country’s access to capital markets? This is, after all, a sovereign borrower with a big presence in bond markets and the country’s banks and companies also rely on international funding.
We discuss why the reaction to the interest rate cut in the bond market was muted but highlight the risks that loom large for Turkey’s capital markets.
Meanwhile, the self-styled “CEO of El Salvador — its president Nayib Bukele — is attempting what might generously be called a novel form of sovereign financing. He wants to issue a $1bn bond that pays out based on the performance of Bitcoin. And he wants to use some of the proceeds to build a new city… called Bitcoin City… at the foot of a volcano…
We deliberate over whether this is a good deal for investors or not (spoiler alert: we don’t think it is) and what Bukele might be up to.
We also discuss the latest findings from our survey about life in the capital markets after Covid and how it has affected banks’ attitudes to diversity.