Weak growth and the prospect of deflation in the eurozone in 2015 will leave corporates limited options but to seek growth through mergers and acquisitions (M&A), predicts Fitch Ratings.
In its report on the outlook for Europe, the Middle East and Africa (EMEA), entitled
‘EMEA Corporates Bond Market Monitor’
, the credit ratings agency (CRA) states that the challenge facing corporates is reflected in the net negative bias in Outlooks and Watches for Fitch-rated firms, although the improving trajectory of this trend indicates diminished downgrade pressure for the year ahead.
Issuance is set to remain strong in 2015, as corporates further seek to benefit from record low yields and with further spread compression to pre-crisis levels a possibility. Pre-funding remains an on-going trend, where issuance exceeds maturing bond volume.
Corporates refinanced at a rate of 1.8x 2014 maturities in the first 10 months of 2014, down marginally from 2.2x for the same period a year earlier. Overall, corporate issuance declined 6% year-on-year (YoY) over the period. With a healthy pipeline in the run up to year-end, full-year issuance may still exceed the €383bn all-time high in 2013.
Lower European benchmark rates and a weaker euro boosted euro-denominated issuance by US corporates by 70% YoY to €28bn in the 11 months to November 2014. Euro-currency bonds by US firms comprised 8% of total issuance, the highest since taking a 9% share in 2007. Policy divergence between Europe and the US provides further scope for the trend to continue into 2015 and beyond, says Fitch.
Investment-grade bond yields fell to a fresh record low of 1.16% in November, while issuance was close to the monthly high for 2014, as investors bet that the European Central Bank (ECB) will undertake further unconventional measures to counter disinflation and stimulate growth. With yields set to decline further and curves flatten if inflation expectations continue to disappoint in 2015, firms will continue to tap the bond market – particularly repeat and debut speculative grade borrowers seeking to secure low yields.
European high-yield is set for another record year in 2014, with corporate issuance up to rthe end of October growing 21% YoY to reach €92bn, 6% ahead of total 2013 Issuance will continue to be healthy in 2015, supported by rising M&A activity and refinancing as legacy issues approach call dates.
Search-for-yield and the concomitant compression in spreads has led to a rise in single B rated issuance as riskier credits and first-time issuers tap the market to secure favourable borrowing terms, while access to loans remains constrained as banks continue to repair their balance sheets.
Telecoms, media and technology (TMT) firms increased their issuance 18% YoY over the 10 months to October 2014, while volumes in almost all other sectors declined. The TMT sector experienced an 81% reduction in its negative rating bias in the period, as upgrades rose by 2.5x and downgrades halved.
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