One of the more noticeable things about Europe’s public investment grade corporate bond market is just how steady it has been over the past two years. But one metric has soared above all — the amount of new issue premium borrowers have had to offer to raise benchmark funding.
An investigation into GlobalCapital’s Primary Market Monitor data on syndicated euro issuance of benchmark size — that is to say, deals of €500m or more — from investment grade corporate issuers since the start of 2021 reveals a great deal of consistency around the number of deals, their average size, how much demand they generate and how much issuers are able to move pricing during execution.
But one measurement stands out: since the first quarter of 2021, the average new issue premium a borrower has paid on such a deal has risen from minus 0.2bp to a positive 19bp in the fourth quarter of 2022.
By far the biggest leap came between the end of Q3 2021 and Q4 of that year, when the average new issue premium rose by 9.9bp to 13.2bp. Although it fell to 10.7bp in the first quarter of 2021, it has never been below that level since, and never higher as far back as Primary Market Monitor’s data goes.
The change gives a clear view of how investors have changed in their assessment of investment grade corporate credit risk as inflation and interest rates started to rise, and as the threat of recession loomed larger. The ECB’s Corporate Sector Purchase Programme was a big factor in the market but the rate of buying was quite steady until June 2022, when it stopped net purchases.
Over the same period, issuance was remarkably consistent. There were 363 euro benchmarks issued in 2021 and 326 in 2022 up until November 17. In both years, the first quarter was the busiest — 119 deals in 2021 and 135 in 2022. The average deal size has shrunk in 2022 but not by much. It was €726m in 2021 and €682m in 2022 so far. Total volume was €264bn in 2021 and has dropped to €222bn in 2022 to date, demonstrating how issuers have paid up to get roughly the same amount of funding done.
Those higher premiums have generated similar demand levels across the two years with an average subscription ratio of 3.4 times the deal size in both years. Quarter by quarter, there was little deviation from the mean in 2021, with the average ranging between 3.2 and 3.6 times deal size.
That figure dipped to 2.6 times amid the uncertainty of the second quarter of this year but rose to four times in the third quarter, which helped issuers bring down their average new issue premium from 14.6bp to 12bp.
Meanwhile, the amount issuers have been able to tighten pricing on their euro benchmark syndications has also been consistent. Issuers had the most success in the fourth quarter of 2022 and the first quarter of 2021 — an average tightening from initial price thoughts to re-offer of 29.8bp and 29.7bp respectively.
That figure has risen each quarter in 2022 from 25.6bp in the first three months of the year, delivering an average for the whole year to date of 26.5bp versus 27.7bp for 2021. GC