Hayley Basterfield, Global Head of Bond Syndicate & Liability Management and Nick Hughes, Head of Capital Markets, Lloyds Bank Corporate and Institutional
Coming into 2024, everyone knew that politics would dominate the headlines with around 1.5 billion people heading to the polls globally including important elections in the UK, the US and Europe. In the event, the excitement has been further elevated: Prime Minister Sunak called an earlier than anticipated general election in the UK while the results of the European Parliament elections prompted President Macron to call a snap National Assembly election in France.
To some extent, such news flow matters. Markets inevitably anticipate or react to events. Where they are unexpected — as in France — investors can react sharply: both government bonds and the euro sold off following the surprise decision.
However, at the same time, national politics, and broader geopolitical factors, which also influence markets and are especially volatile at the current time, cannot be the major consideration for issuers planning to come to market. They should focus on their objectives — clearly defining successful outcomes — prepare carefully, and perhaps most importantly, retain an open mind and a flexible approach.
Expectations have evolved
Away from politics, the main focus for markets this year has been the timing and scale of interest rate cuts in the UK, the US and Europe. In the early part of the year, there was an expectation that rates would fall sooner rather than later, resulting in markedly lower policy rates by year end. Sticky inflation put paid to such expectations (though the European Central Bank has since broken ranks with the Federal Reserve and the Bank of England by cutting rates).
Nevertheless, as rate expectations have evolved, one outcome has been a significant increase in risk management. Corporate activity, in both sterling and euro, has increased as clients have stopped waiting for cuts. Instead, an increasing number have sought to pre-hedge future transactions using swaps — to lock in expectations of cuts — with a view to refixing when rates come down.
Other borrowers are locking in for the duration, taking advantage of the current inversion of the GBP forward curve. In part, this reflects an acceptance that the ‘new normal’ for rates might be 3.5% or even 4.5% compared to the historic lows that prevailed for over a decade.
Preparation is key
Whether dealing with political change or changing rate expectations, one lesson that issuers should take away from the first half of 2024 — as they look to opportunities in the second half — is the importance of clear objectives, planning, and a flexible mindset.
Some issuers have secured their 2024 funding early, anticipating UK and US elections, but many have not. They instead take the view that while sentiment may fluctuate, all markets are unlikely to be closed at the same time. The aim is therefore to remain flexible in terms of structure, currency, or investor base (shifting from public to private market formats as needed, for instance).
To do this, corporates need to redefine success. While maintaining long-term investor relationships and clear cost and maturity targets are essential, issuers shouldn’t fixate on particular markets, currencies, or structures at specific times. They should be ready to pivot, by offering a shorter- or longer-dated tranche to meet investor expectations, for example (provided it aligns with their broader funding strategy).
Another aspect of this mutually-advantageous opportunism — which benefits both issuers and investors — is that issuers should be prepared to take a pragmatic approach to pricing. In frothy markets, issuers may seek to extract every basis point from a transaction. However, in today’s more volatile markets, they should aim to embed long-term relationships by ensuring a positive outcome both for themselves and their investors.
Not all desks are equal
Given the need for flexibility when it comes to deals, it’s important for prospective issuers to work with a bank that has proven credentials in multiple markets (as well as strength in derivatives to facilitate pre-hedging, for example).
Understanding a bank’s structure is equally critical. Working with a bank that operates as a single desk for the UK, US, and Europe means that the entire team is focused on client outcomes. They can provide comprehensive guidance on various options — sterling, dollar, or euro; secured or unsecured; public or private — and explain their attractions in different scenarios. Such agnostic advice can help clients optimise their issuance in the second half of 2024.
For more information, visit our Corporate & Institutional solutions page.