Deals are being pulled and it is most likely not down to a poor effort from the banks hired to place them. With volatility only going to get worse, issuers are faced with the stark option of demanding less or risking being humbled by a disinterested market.
Things had been looking good for Sagess, the manager of France’s strategic oil reserves. Oil prices have been on a tear all year, starting at around $78 a barrel in January to sit at $112 on Tuesday. That tends to act as a rising tide lifting all boats for anyone in the oil sector and the way they are viewed by investors.
At the same time, the issuer had been a semi-frequent name in the markets before domestic legislation changes stopped it from issuing debt past 12 months. This was going to be a grand return for a borrower with a following.
The trade had Natixis and HSBC as global coordinators, and BNP Paribas, Crédit Agricole, and CIC as active bookrunners. These are not regional US banks trying to sell French euro debt, but dealers well entrenched in the market with a huge network of investors to tap into.
The issuer spoke with investors last week, giving a good gauge of whether demand existed. When books opened, it was for a small benchmark at the shorter end of the seven to 12 year maturity range that the agency said it wanted.
Withering on the screen
Yet none of this was enough to push the deal over the line, with Sagess postponing it not long after setting the spread in line with initial price thoughts.
It's not just happening in euros either. CDPQ, the Canadian agency, pulled a long three year dollar deal on Tuesday. Bank of America, Goldman Sachs, Morgan Stanley and RBC, all dollar market stalwarts, were the leads on that.
And other markets are feeling the same pinch. In the FIG market, Close Brothers had to yank a five year sterling deal after failing to drum up enough demand for a £250m trade.
HSBC, Lloyds and NatWest were on that deal — sterling market natives.
That is not to say the banks on either deal did a noticeably bad job. The reality is the underlying market is an unforgiving place — which bank would have done much better when swap spreads are moving 10bp plus between opening books and setting the spread?
When the market is so volatile that even the combined experience of firms among the best dealers — banks that have every incentive to price a deal to clear — in a variety of markets is not enough to ensure a successful deal.
Borrowers have two choices: they either need to set their sights lower and be less ambitious with their deals, or, as we have seen this week, they can stick to their guns and watch their deals flop, leaving them to try again at a time where the market may well be whipsawing, wider or worse.
Considering the European Central Bank has yet to start raising rates, and inflation is expected to reach a new record this week in Europe, things are going to get worse before they get better.