Company bond sales have ground to a halt in Europe, with August poised to end without a single offering as the sovereign debt crisis drives borrowing costs up by 40 percent.
“When spreads are moving so quickly, it’s very difficult to see clearly how to price new issues,” said Olivier Casanova, the head of financing and treasury at PSA Peugeot Citroen in Paris, which last sold bonds in euros on June 15. “Conditions are very volatile.”
Bayerische Motoren Werke AG, the world’s biggest maker of luxury vehicles, was the last non-financial company to sell debt in the common currency maturing in longer than two years, borrowing 1 billion euros ($1.4 billion) on July 22 in a bond due 2018, according to data compiled by Bloomberg. Only banks’ top-rated, asset-backed covered bonds are being sold as investors seek the safest corporate securities.
The extra yield investors demand to own corporate bonds rather than government securities surged to a two-year high of 186 basis points from 134 at the end of July, Bank of America Merrill Lynch indexes show. Yield premiums are climbing as speculation Greece will default forces the European Central Bank to buy Spanish and Italian bonds, and after second-quarter euro-area growth slowed to the worst since the region emerged from recession in 2009.
Italian highways authority Autostrade is credited with opening the Eurobond market for corporate bonds, with a $15 million issue in July 1963.
No ‘Buyers’ Strike’
“This isn’t a buyers’ strike,” said Mondher Bettaieb- Loriot, who manages the equivalent of about $870 million at Vontobel Asset Management Ltd. in Zurich. “Buyers are just scratching their heads. Investors have plenty of cash but everything is made more complicated by the economic and sovereign issues.”
Gross domestic product in the 17-nation euro region expanded 0.2 percent in the second quarter, the European Union’s statistics office in Luxembourg said Aug. 16. The German economy, Europe’s largest, almost stalled, growing 0.1 percent from the first quarter, when it expanded a revised 1.3 percent, according to the Federal Statistics Office in Wiesbaden.
In the absence of company bond sales, banks including Barclays Plc, the U.K.’s second-largest lender, and Austria’s Erste Group Bank AG have had the market to themselves with covered bonds secured on mortgages and public-sector loans. Lenders pushed issuance of the top-rated debt to about 17 billion euros this month, data compiled by Bloomberg show.
August is typically the slowest month for European corporate bond sales as schools and factories close and bankers and investors across Europe head off for vacations. Company bond sales have dropped 11.5 percent to 57.6 billion euros this year compared with the same period in 2010. Borrowing reached a record 263.2 billion euros in 2009, up from 123.4 billion euros in 2008, according to Bloomberg data.
“We’ve seen nothing, zilch,” said Suki Mann, the head of credit strategy at Societe Generale SA in London. “I would suspect that there’s always been a strong suspicion that something would go wrong.”
Gauges of European company creditworthiness are headed for their worst month ever. The Markit iTraxx Crossover Index of credit-default swaps on 40 companies with mostly high-yield credit ratings is up 255 basis points so far in August, climbing to 693 basis points. That compares with a jump of 207 in October 2008 after the collapse of Lehman Brothers Holdings Inc.
More borrowers are set to renege on their obligations, according to Moody’s Investors Service. The global default rate will increase to 1.8 percent in 2012 from 1.5 percent at the end of 2011 as the risk of recession persists, Moody’s forecast in an Aug. 8 report.
“Borrowing money when you don’t need it is still expensive,” said Frederic Zorzi, the co-head of global syndicate at BNP Paribas SA in London. “Things are quiet at the moment. It might even be very slow in the first week of September because no one wants to be the first to come to market.”