Capital Markets Weekly: Year-end data flags strong Euro-denominated issuance and selective IPO markets during 2019

Year-end data shows near-record issuance volumes in the Euro sector during 2019, a sharp decline in the stock of negative yielding debt since August, but a relatively disappointing year for IPO sales despite sizeable stock-market gains in 2019.

Developed-market debt

A Financial Times report on 23 December noted that the global stock of negative yielding debt has declined to USD11 trillion.

• After the recent bond market sell-off, this total now stands USD6 trillion below its summer peak.
• From a late August low of -0.41%, France's 10-year OAT stood at a positive yield of 0.1% on 30 December.
• Germany's 10-year Bund, which entered negative territory in June to achieve a record low yield of -0.74%, stood at -0.20% on the same day.
• Its 30-year bond stood at +0.33% versus -0.28% in mid-August 2019.
• On 2 January, Austria's 10 year bond also moved into positive territory

Also on 23 December, a Reuters report using Dealogic data noted that US investment grade corporate issuance denominated in Euros had reached EUR93 billion in 2019, four times its 2018 level and roughly 50% above its prior 2016 peak:

• US borrowers represented 27% of such sales.
• The growth is attributed to low rates in the segment - where average yields stand at 0.48%, versus 1.25% at the start of 2019, the availability of long-duration demand (US issuers accounted for half the 30-year corporate debt sales according to Refinitiv data), and the attractiveness of US supply to investors.
• The latter reflects that US issuers are not eligible for ECB purchase and thus offer a yield premium of up to 25 basis points.
• An earlier report by Global Capital on 18 December reported that for the wider North American region, total issuance had reached EUR198 billion in 2019, versus EUR156 billion in 2016 as the prior high-point.

The same source reported that - using Dealogic data - total Euro-denominated issuance spanning the public, financial and corporate sectors had reached EUR1.381 trillion by 18 December, versus the EUR1.389 trillion full-year record achieved in 2006.

Within extremely light, seasonally-affected supply, the German state of Lower Saxony announced on 30 December that it had appointed banks for a EUR1 billion 10-year deal, which it duly launched on 2 January.

Emerging markets

According to IFR, Laos has closed 2019 with a USD150 million 18-month issue at 8.5%.

• In early October it had raised THB14 billion (USD464.2 million) in the Thai domestic capital market, with the placement of three, five, seven, 10, 12 and 15-year tranches with coupons from 3.65% to 6.05%.
• Just over half (THB7.2 billion) the Thai-targeted sale was allocated to infrastructure development with the remainder applied to redeeming an existing bond (THB1.8 billion) and loans, according to an involved banker cited by The Nation Thailand.
• According to a Nasdaq report in November, the new dollar sale is the first by Laos to target international buyers: a prior dollar sale in 2015 was targeted to Thai buyers.

Banco Pichincha, Ecuador's largest bank by assets (with a 26% share), has become the country's first green bond issuer, with a USD150 million sale.

• This was placed with three official buyers, IFR, IADB and Proparco, part of France's AFD.
• IADB assisted in designing the bond, which will target projects in renewable energy, transport, waste management and construction.

Equity

On 30 December 2019, using Dealogic data, the Financial Times noted that despite the strong performance of equity markets in late 2019, the number of IPOs fell globally to 1237, roughly a 20% decline and the lowest level for three years.

• The total volume raised fell less sharply, dropping 10% to USD188.8 billion. This outcome was significantly boosted by the record sale by Saudi Aramco.
• In Europe and MENA, the total of 179 deals was the lowest in seven years and 40% below 2018 levels.
• Deal numbers also fell in Asia and the US, with the former at a five-year low.

Despite the often-cautious primary market conditions global stock market performance in 2019 was strongly positive. The FT's All-World index ended the year up 23.8%, its best gain since 2009, the MSCI Emerging Markets index rose 15.89%, and the Dow Jones index recorded gains of 22%, while the S+P 500 index showed gains of 28.9%. Although European growth prospects have been a focal area of concern, the EuroStoxx 50, CAC 40 and Dax indices all gained around 25% in 2019, while Italy's FTSE Mib index recovered almost 29%. Within the larger European indices, Spain's Ibex 35 was a relative laggard, with gains of 11.82%.

Implications and outlook

• It is unsurprising that 2019 Euro-denominated bond issuance volumes were at or around record levels, with substantially-increased and record US supply, given the ECB-fueled historically low interest rate environment in 2019.
• We have flagged repeatedly that prevailing interest rates give borrowers strong incentives to refinance existing debt to lower borrowing costs and lock in historically-low rates for extended terms if available. This process is likely to continue in 2020.
• The growth in Euro-denominated issuance by US firms also appears a natural response to the favorable issuance conditions available in the sector, combined with a logical desire to diversify funding sources.
• Bank of America research forecasts that this trend is likely to continue, suggesting the US share in the ICE/BOA Eurozone corporate debt index will rise to 20.8% by 2020 from the current 18%. It suggests that firms such as Amazon and Visa which have revenue streams in Euros could debut in the sector within 2020.
• The recent rise in rates and reduction in the negative-yielding debt stock reflects the more constructive environment for global growth. Key positive factors have been multiple indicators of an easing in US/China trade conflicts, and signs that the European economy could start to improve during 2020. This has led IHS Markit's Economists to include the possibility of a late 2020 US rate increase within our key forecasts for 2020.
• Despite the impressive 2019 issuance volumes, investors who committed new funds to Euro-denominated debt investments during the third quarter face significant mark-to-market losses, especially on long-dated negative yielding bonds bought at the time. This salutary lesson may limit appetite for negative yielding debt, especially for very long terms, during 2020.
• With the ECB expected to maintain its expansionary stance in 2020, while the Federal Reserve could move towards tightening in late 2020, the search for yield in the Euro-denominated sector is likely to benefit corporate, sub-investment grade and emerging market debt. These areas offer the benefits of generally-positive yields, with the latter offering relatively sizeable returns for longer dated instruments.
• Given the recent market selloff and lower levels of expertise in the latter, riskier categories, expansion in these areas is likely to be finite in scale (rather than a headlong rush for yield), but the Euro-denominated market could well take a higher share of global issuance in these areas during 2020.

Equity performance was volatile for much of 2019, making the reversal in IPO numbers unsurprising.

• For much of the year, stock market sales were hindered by perceptions of slowing growth, exacerbated by major global trade uncertainties, and by growing concerns over the often-ambitious valuation models used by companies offering new technologies.
• These concerns have eased in late 2019, and further improvement in indicators for economic performance should be helpful in sustaining the more favorable stock market climate prevailing in the last quarter of 2019.
• However, as indicated by heated public debate over the valuations for several major IPOs - notably the failed deal for WeWork - investor caution over valuations appears well-entrenched heading into 2020. While this makes new share sales harder, this is also more likely to increase market stability and reduce the risk of speculative excess.
• Higher valuations are likely to encourage supply in 2020. In this regard the favorable reception for larger deals in the fourth quarter provides a more encouraging background for new supply.

Posted 02 January 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit