There’s never been a better time to be a corporate treasurer in Europe as cash-rich investors line up to buy bonds at the lowest rates ever.
“Treasurers are in pole position,” said Henner Boettcher, funding chief at HeidelbergCement AG, which raised 300 million euros ($400 million) from bond markets on March 2. “If you’re a company needing cash, right now is the time to get it.”
Company notes have become a haven for fund managers wary of placing their cash with the most indebted European governments. Investors consider corporate bond yields to be generous compared with benchmarks and view companies as well placed to benefit from the easing of Europe’s credit crisis in the wake of Greece’s bailout.
Treasurers are exploiting the investor demand, which has driven corporate bond yields to a record low of 2.59 percent, Bank of America Merrill Lynch’s EMU Corporates Non-Financial Index shows. Investors put 12.5 billion euros into European bond funds in February, the biggest inflow since August 2010, data compiled by Morningstar Inc. show.
Bond sales surged in March as carmaker Daimler AG in Stuttgart, Germany raised 750 million euros after boosting an offering from 500 million euros, Fiat SpA issued its first benchmark deal since July and commodities trader Glencore Plc sold $2.1 billion of securities. Offerings totaled 83 billion euros this year, the busiest quarter since the second quarter of 2009, according to data compiled by Bloomberg.
“There’s a lot of investor demand out there and it’s reflected in spread developments over the last month,” said Hans Tschuden, chief financial officer at Telekom Austria AG in Vienna, which raised 750 million euros from 10-year bonds on March 26. “Now might be a good time to tap the markets rather than wait and take what’s offered later.”
The yield premium on corporate bonds to benchmark German government debt has narrowed 56 basis points this year to 145 basis points, or 1.45 percentage points, just above the 7 1/2-month low of 139 reached on March 16, Bank of America Merrill Lynch data show. The absolute yield fell 74 basis points since the start of the year.
“Spreads still look relatively attractive across large swathes of the corporate sector, but it’s the all-in cost of funding that’s driving treasurers to pull the trigger now,” said Duncan Warwick-Champion, an analyst at European Credit Management Ltd., the London-based investment firm owned by Wells Fargo & Co.
Treasurers also are turning to bond markets on concern that stricter capital rules designed to prevent future financial crises will curb lending from banks. That may stifle companies’ funding options as lenders segment clients by profitability and credit ratings, analysts at Greenwich Associates in Greenwich, Connecticut wrote in a March 28 report.
“One of the mantras we use is ‘fund early, fund long,’” said Martin O’Donovan, deputy policy and technical director at the Association of Corporate Treasurers in London, which represents 4,500 company finance officials. “Companies selling bonds are clearly changing the structure of their balance sheet towards debt capital from bank funding, which is understandable given everything which has gone on with banks.”
Treasurers are also benefiting from the European Central Bank’s program of injecting banks with more than $1 trillion of cheap loans and a successful Greek debt-swap that led to a second bailout, easing concern that the region’s sovereign debt strains will trigger corporate defaults.
Bond buyers pulled back last year on concern European leaders couldn’t contain the credit crisis, which forced an increase in borrowing costs that also sidelined issuers. The sales slowdown meant investors accumulated cash as companies redeemed 60 billion euros of securities in the second half, and issued about 40 billion euros, according to Societe Generale SA.
Corporate debt’s status as a haven is allowing it to ride out the worst of the euro area’s woes.
European officials meeting in Copenhagen last week agreed to cap new rescue lending at 500 billion euros, adding to the 300 billion euros already committed to Greece, Ireland and Portugal since 2010. The Organization for Economic Cooperation and Development said March 29 that the situation in the euro area is “expected to remain fragile.”
This year’s surge in the government bonds of Italy and Spain is starting to fade as austerity budgets spur strikes and stifle economic growth. Investors demand a yield premium of 3.43 percentage points to hold Spain’s 10-year government debt rather than Germany’s while Italian debt has a spread of 3.19 percentage points.
Corporate bond issuance is showing signs of slowing with sales dropping to 6 billion euros last week, down 36 percent from the week before.
“The lessons of last year are that you can’t automatically assume that the market will be there for you in the size and capacity that you want it,” said Jane Pilcher, treasurer at Anglian Water Services Plc in Huntingdon, England, which sold 250 million pounds ($400 million) of notes on March 20.
Even if the euro-region crisis flares up again, there are signs that corporate treasurers will keep accessing the debt market. Companies need to redeem about 126 billion euros of bonds in the common currency this year, according to estimates from ING Groep NV.
From investors’ point of view, company notes represent good value relative to benchmark government debt. German bund yields are approaching record lows with the 10-year rate at 1.79 percent, 12 basis points off the 1.67 percent reached in September.
“There’s a huge amount of liquidity out there that needs to be invested and everyone’s hunting for yield,” said Nicolo Bocchin, a portfolio manager at Aletti Gestielle SGR SpA in Milan. “So we have a nice marriage from investors who need to put money at work and companies that can take the chance to refinance.”