Thursday, August 13, 2020

Companies are flooding the bond market

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Wunleashed, companies secure liquidity in the corona crisis in order to prepare for difficult times. While states such as Germany are opening up rescue packages on a gigantic scale to protect SMEs and companies, there is an astonishing development on the bond market. New issuance records for corporate bonds are set almost every week. Last week European companies with good investment grade credit issued 42 billion euros in new securities. In the two previous weeks, it was around 30 billion euros each.

The companies have also been very active in recent days: nine addresses, including Toyota, Akzo Nobel, Veolia and Deutsche Bahn, issued titles worth almost 8 billion euros on Tuesday. Deutsche Bahn, controlled by the federal government, placed a 20-year bond with a volume of 750 million euros. The coupon is 1.375 percent. On Monday, Sanofi, Repsol and Holcim took advantage of the good mood. The analysts of the Bayerische Landesbank (Bayern LB) counted issues of more than 4 billion euros at the start of the week. The flood of emissions can be observed not only in Europe, but also in the United States. Demand is not always high, but sales are generally not a problem after the risk premiums have recently increased significantly as a result of the upheavals on the financial markets and have thus become attractive again for investors. Although the market is primarily open to large, well-known companies, there are also addresses that occasionally make it, whose creditworthiness is rather moderate. The European Central Bank (ECB) also supports with its corporate bond purchases.

No all-clear

But for Commerzbank bond strategist Marco Stöckle there is no reason to give the all-clear. “The corporate bond market is still in intensive care,” he told F.A.Z. Although the ECB’s extensive purchases would have contributed to stabilization, unlike the credit default derivatives, the risk premiums had not really been reduced yet. “A sustained recovery is also not yet to be expected because the creditworthiness of many companies will be downgraded in a recession and we are only at the beginning of this wave,” feared Stöckle.

He points to the hunt for liquidity, which has led to the surge in emissions of new euro corporate bonds. In the past two weeks, these would have amounted to 75 billion euros alone. For Stöckle, this is an enormous volume that the market would have to digest even in good times. This wave of emissions therefore also superimposed the effect of the ECB purchases. The central bank bought corporate bonds worth a good € 10 billion in March. Last week it was almost 2 billion euros. However, it is not known how many corporate bonds were bought under the pandemic program, which totaled € 750 billion. The ECB only shows the total volume of the bonds purchased. That was a good 30 billion euros last week. The analysts at DZ Bank assume that the pandemic program “undoubtedly has also bought large corporate bonds”.

Investors are currently watching the consequences of the economic standstill and the inevitable recession with great suspense. On the bond market, the focus is on the rating agencies, which are downgrading more and more credit ratings from companies. On Wednesday it hit Swiss technology group ABB, whose rating lowered Moody’s from “A2” to “A3”. ABB does not have to worry about the investment grade rating that many institutional investors such as insurers or pension funds have to look out for in corporate bonds. Because this status requires a rating of at least “Baa3” for Moody’s or “BBB–” for Standard & Poor’s. ABB is separated from the junk status by four levels. The steel group Arcelor-Mittal, on the other hand, lost its investment grade rating at Fitch because the creditworthiness examiners expect a decline in steel demand despite a good liquidity situation.

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