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Debt Capital Markets 2018 Review and 2019 Forecast

Year-end report from Societe Generale's Debt Capital Markets and Syndicate teams.

In the "Debt Capital Markets 2018 Review and 2019 Forecast", GLFI/CMK, GLFI/ABP and GLFI/SYN provide a description of the main trends in the International Debt Capital Markets in 2018, together with our thoughts and predictions for 2019 across a variety of market segments (Bonds, Loans, Hybrids, Securitisation, Liability Management).

The document is sent to our most valuable clients and to the relevant media.


Executive Summary

 

"We have normality. I repeat, we have normality. Anything you still can't cope with is therefore your own problem." - Douglas Adams


 

In last year's edition, we commented that the outlook for the second half of 2018 was more uncertain, particularly in Europe. We were right with the direction and less accurate about timing. Markets started to deteriorate as early as May.
For the first time since 2011, the endless growth of corporate new issue volumes in euros was put to an end. Execution risk has resurfaced with "go/no-go" calls suddenly becoming interesting discussions. Several live transactions had to be pulled, and many more quietly stood down as funding terms became less compelling than loan opportunities. Investors have become more selective and deal sizes are once again highly price sensitive.

But since the peak of the Italian elections crisis in May the market has also seen healthy periods. Credit, supras and agencies have all demonstrated their defensive strengths. Long-dated deals, inaugural transactions and unrated bonds have all had moments where they were well received. Investors for the large part are still adding money to the asset class and even in the face of greater volatility, there is no sign of any great rotation. New issue premium is rising, but M&A refinancing and strategic offerings still continue to account for a large part of the volumes.

We are at the end of a chapter where the spectre and umbrella of the European Central Bank resulted in markets being both resilient and attractive. This return to "normality", should in the longer run be beneficial to the most traditional asset-managers, insurance companies and pension funds. Their voice had become more difficult to hear due to the overwhelming presence of central banks and, in some cases, hedge funds (e.g. sovereign bonds). It will also to some extent facilitate market reading by issuers and banks, which will be able to derive pricing indications out of more reliable secondary curves. And it will also benefit specific market segments, such as covered bonds or green bonds.

Green bonds, in particular, will benefit from a very favourable alignment in 2019. Demand continues to expand at fast pace, as asset managers are pressed by both their clients and the regulator to accelerate and document their sustainable policy investments. In contrast, supply expansion is slowing down for the first time, as more and more issuers have difficulties sourcing enough eligible assets to be able to issue every year. Finally, with the ECB demand fading away and execution risk on the rise, the premium attached to green bonds by buy-and-hold investors will become increasingly palatable for issuers. It is already a reality for frequent issuers such as the European Investment Bank or KfW, that their secondary green bond curve is not aligned with their "general purpose" bonds. And whilst the list of "more difficult than expected" transactions has been populated steadily during the year across sectors, green bonds have in contrast enjoyed a strong momentum in almost all market conditions.

When reflecting, 2018 has still been a good year for bond markets. Underlying yields and new issue premium remain compressed, although with greater volatility from one week to another and from one sector to another. The euro market continues to gain market share with non-European and non-US issuers and, like its big cousin in the US, has showed its capacity to reprice quickly in volatile markets, allowing those issuers with important funding needs to access the market when they decide to, as illustrated by Takeda and Volkswagen in November. As already demonstrated this year, "stop and go" will unfortunately be difficult to avoid in some areas, such as the high-yield and emerging markets segments, but do remember that such periods were relatively normal prior to central bank intervention.

The scene is set for 2019: more demand for sustainable and green bonds, more selective investors, more attention to credit stories and sectorial trends, and more competition among issuers for liquidity. Rates and new issue premium are expected to be on the rise, but these will be very difficult to predict, due to the growing influence of political and macro-economic uncertainties and competing supply. More than ever, a close monitoring of market drivers and investor behaviour will be critical to allow potential issuers to make the right choices.