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Volvo dives into Europe’s ‘frozen’ bond markets

Swedish carmaker Volvo surprised investors this week by raising €500m in loans – a rare deal in Europe’s parched corporate bond markets, which are perfectly calm even by summertime standards.

Investors placed orders worth €3.2 billion for the deal, which was one of just a handful to go to market over several weeks. The amount raised in European corporate bonds so far this year has fallen to its lowest level in almost 20 years, down 18 percent from the same period last year. According to data from Refinitiv, European governments spent 47 percent less than in the same period last year.

Equity markets are even more subdued. The amount raised by companies going public for the first time is down 92 percent year-on-year, data from Refinitiv shows.

The slowdown shows how shaky markets, a dark economic cloud from Russia and rapidly rising interest rates are making it difficult for companies to tap markets that have been bountiful sources of funding for years.

“Primary markets have been hit quite a bit due to volatility [and] Liquidity has been very challenged,” said Snigdha Singh, co-head of European fixed income, currency and commodities trading at Bank of America.

Years of low interest rates, exacerbated by the pandemic, fueled an abundance of corporate and government bond transactions as executives raised new funds and pushed existing debt service obligations further into the future.

But with energy price shocks and global supply chain problems, global central banks’ priorities have shifted from stimulating inflation to fighting inflation. The European Central Bank has halted its decade-long bond-buying programme, which has acted as a safety net and comforted markets since the financial crisis.

The bank has now hiked interest rates to zero, ending a decade of negative interest rates and following the Federal Reserve in raising the cost of borrowing.

With the ECB ripping off its safety net and a recession looming across Europe, investors have shied away from funding riskier corners of the market. According to Refinitiv, the amount raised by the lowest-rated, high-earning companies is down 79 percent so far this year compared to the same period in 2021.

Bar chart of amount raised by government bond issuance (USD billion) showing that European governments' fundraising has declined from pandemic highs

“We had quite an extensive pipeline in late spring [but said] “Let’s put the pen down,” said Tomas Lundquist, head of European corporate bond capital markets at Citi, adding, “In May and early June, the level of confidence that we needed to get the best possible prices wasn’t that high.”

Additionally, the rush of bond market activity over the past two pandemic years meant that “most companies had already called on their debt and had no immediate funding needs,” he said.

Column chart of high yield bond issuance ($Bn) showing that Europe's riskiest companies are facing a debt trades drought

Volvo’s move was rather opportunistic. Citi’s Lundquist, who led the deal, said the automaker’s timing was “very good” after US inflation data came in a little softer than investors feared and that the company “acted very quickly when they received this.” saw attractive windows”.

That underscored bankers’ confidence in central bank policy to shore up activity for the remainder of the year. Investors and analysts are trying to navigate the uncertain outlook with new data releases to paint a picture of if and when inflation will cool and to predict the trajectories of major central bank interest rate changes.

US inflation rose 8.5 percent year-on-year in July, a slower rise compared to June and lower than economists had expected – raising hopes the pace of price increases in the world’s largest economy is peaking Has.

The data was closely watched by investors looking for clues as to how far the Fed will hike interest rates to curb rapid price growth.

Markets now feel “in a bit firmer footing” compared to July, said one banker, “with a bit more stability and even some new corporate transactions in Europe [in August]. There is more optimism.”

Stock markets may recover more slowly. Companies that have been listed in the market frenzy over the past two years have had their valuations slashed. For example, the valuation of grocery delivery service Deliveroo has fallen to around £1.7 billion from more than £5 billion when it was listed in London last year. That put off fund managers.

“Companies that have thought about it [listing] are taking time to see things settle down and sellers may need to adjust valuation expectations as well,” said Tom Johnson, co-head of European capital markets at Barclays.

“After a market slump, there’s always a bit of ‘Who wants to be the first to step off the sidewalk?’ Many issuers would prefer to see data points from other people first.”

Debt bankers remain more positive and say they are encouraged by recent bond market rallies. Total returns on Europe’s riskiest debt are down nearly 10 percent this year, but yields have rebounded more than 6 percent from a June low, according to data from ICE Bank of America. An index that tracks higher-quality debt has also rebounded over 5 percent from a June low.

Bankers are hoping that a few successful deals could encourage more to jump in.

“We shouldn’t underestimate the herd mentality,” says Josh Presley, Managing Director of Credit Suisse. “A good deal opens the door for others.”

https://www.ft.com/content/43b3d530-30ae-43b2-9701-b34ff05ac44c Volvo dives into Europe’s ‘frozen’ bond markets

Adam Bradshaw

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