The US private placement (USPP) market saw only one US$1bn-plus transaction last year against seven in 2012, reports Lloyds Bank in its annual review of the market.
Lloyds said that its prediction at the start of last year that 2013 issuance would be down slightly due to pre-funding and the seven ‘jumbo’ deals in 2012 was borne out. Global market volumes were down 11% although the number of transactions edged up 4%, from 187 to 194.
Issuance from the UK in the USPP market was US$9.1bn, down 7% from 2012’s record while the number of transactions was up slightly at 34. The infrastructure sector continued to grow with 2013 including five transactions totaling US$1.7bn driven by the shift from bank financing to bonds.
Europe experienced a sharp reduction with volume down 35% as corporates looked to alternative sources of funding such as the bank market, where Investment grade lending was up 27% from 2012 and the EuroBond market where Investment Grade issuance increased 6% during 2013.
In the US, despite an 11% increase in the number of transactions, total volume was down 4% to US$21bn as the average transaction size dipped to US$209m against US$244m in 2012.
Projections for 2014
For the year ahead, Lloyds expects the issuer-friendly dynamics to continue as investors remain focused on adding volume by attractively differentiating their bids in expectation of higher allocations, in particular:
- Providing direct currency: Certain investors are able to execute a cross currency swap at often price- competitive levels versus traditional bank swaps, providing issuers with risk management flexibility.
- Delayed funding: Allows issuers to eliminate the risk of rising rates while pre-funding future obligations; this feature is a mainstay in the market and is likely to remain strong, some transactions in 2013 utilised nine-month delays while three-months has become fairly standard.
The bank expects 2014 to be in-line or slightly higher than 2013 with the key drivers of higher rates and merger and acquisition (M&A) activity broadly offsetting each other. However, a return to 2012’s record levels is unlikely in the absence of a return of ‘jumbo’ transactions.
Lloyds says that event-driven transactions and corporate investment may drive volumes higher as the recovery strengthens leaving companies with renewed confidence in deal making.
Despite expected higher fixed rates in 2014, the overall rate environment is still attractive historically and with credit spreads likely to tighten further, many issuers will not be deterred.
Increased volume can also be expected to be driven by the continued evolution in the financing of infrastructure and energy projects as bond financing gather pace relative to banks which are more focused on shorter term lending. Lloyds comments that the USPP market is well placed given investor familiarity with the asset class and appetite for long-term debt.
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