Though it may be too soon to talk about the death of the corporate bond new issue market, it is fair to say that its health is deteriorating. Syndicate desks and investors have been left with not much new year cheer as supply in January dropped 20% to €9.1 billion compared with €12 billion in 2004, which is 50% down from the €25 billion issued in the first month of 2003.
“Issuance has fallen off a cliff,” says Suki Mann, senior credit strategist at SG, who feels that the corporate sector is awash with liquidity and has no reason to come to the debt capital markets. “If companies don’t need the cash, why issue?” he adds.
Many corporates took advantage of last year’s conducive market conditions to either pre-fund, exchange and buy back bonds or extend maturities. Another factor for the malaise of the primary market, argues Mann, was the marked increase in supply of corporate bonds in 2003 versus 2002. “I believe that for the first time the euro corporate pre-funded in 2003, which is not a normal occurrence,” he says.
Traditionally, issuance is geared to the first half of the year, but some analysts believe that the market may have to wait until the second half of year before supply starts to pick up. Arndt Muthreich, head of credit research at Dresdner Kleinwort Wasserstein, argues that much of this will come from the knock-on effects of rising merger and acquisition activity and rising shareholder power.
“Reduced financial and liquidity positions caused by share buybacks and dividend pay-offs could result in a need to issue bonds,” he says.