 European investment grade corporate bonds: investors should prepare for several mini waves of issuance due to continued market uncertainty
With the Spanish bank bailout request having resulted in €9bn of new corporate bond issuance in just a few hours, Nancy Utterback, Aviva Investors’ Senior Credit Analyst, believes that investors should prepare to invest during such ‘mini waves’ of issuance throughout the rest of the year:
“European companies issued a record €54bn[1] of corporate bonds in the first quarter of 2012. This was largely due to the European Central Bank’s introduction of the long-term-refinancing-operation which boosted market liquidity after a period of extreme volatility. As the European sovereign crisis resurfaced, however, credit markets became more volatile, resulting in April and May being more muted.
“In volatile times, companies try to spot ‘windows of opportunity’ rather than issuing debt at a regular pace. These windows normally open up when markets begin to look steadier post important macro events. We saw this happen on Monday morning following the Spanish bank bailout request. As the year marches on, companies will have to start thinking about financing options for 2013 / 2014 which is likely to lead to further ‘mini waves’ of issuance. Each of those will give investors the opportunity to build exposure to the asset class but the most important thing is to get the timing right.”
Utterback adds that corporate credit has the potential to be a relatively safe haven for investors looking to defensively position their portfolios but can also generate that extra income needed:
“Investors today are looking for less exposure to volatility and secure levels of income. With five year Gilts currently yielding below 2%, the additional 1% – 2% they can get from investment grade corporate bonds has generated a strong demand for the asset class. The investment case is also supported by the fact that many corporate issuers are globally diversified and have broad revenue streams. Most have ensured that following the 2008/09 downturn their balance sheets are in good shape and that they have the ability to withstand potential pressure on revenues. Their fate is very much in their own hands.”
Looking at specific sectors Utterback concluded: “The sectors that look particularly favourable to us at the moment are Media, Utilities and Business Services. In fact the Media industry has been a pleasant surprise. In cyclical downturns, names in this sector can sell off but this has not been the case. Companies now have good geographical footprints and balance sheets are in better shape. We expect them to continue doing well, especially given there are a number of high profile events coming up such as the US elections and the Olympics which they can benefit from.”
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