Volvo plunges into ‘seized’ European bond markets

Swedish manufacturer Volvo AB surprised investors this week by borrowing 500 million euros – a rare transaction in the arid European corporate bond markets which are extremely quiet even by summer standards.

Investors placed orders worth 3.2 billion euros for the deal, with the finance arm of the truck and bus maker, whose bond deal was one of the few to arrive on the market in a few weeks. The amount raised in European corporate bonds so far this year has fallen to the lowest level in nearly 20 years, down 18% from the same period last year. European governments raised 47% less than the same time last year, according to data from Refinitiv.

Stock markets are even weaker. The amount raised from companies hitting the stock market for the first time has fallen 92% from a year ago, according to data from Refinitiv.

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

“Primary markets have been pretty tight due to volatility [and] liquidity has been very difficult,” said Snigdha Singh, co-head of European fixed income, currencies and commodities trading at Bank of America.

Years of low interest rates, exacerbated by the coronavirus pandemic, have encouraged a glut of corporate and government debt deals as leaders raise new funds and push existing debt repayment obligations further into the future.

But with energy price shocks and global supply chain issues, the priorities of global central banks have shifted from stimulating inflation to containing it. The European Central Bank ended its decade-long bond-buying program, which had acted as a safety net and reassured markets since the financial crisis.

The bank has now raised interest rates to zero, ending a decade of negative rates and following the US Federal Reserve in rising borrowing costs.

As the ECB removed its safety net and recession loomed across Europe, investors were reluctant to fund the riskiest segments of the market. The amount raised by lower-rated high-yield companies has fallen 79% so far this year compared to the same period in 2021, according to Refinitiv.

“We had a pretty big pipeline in late spring [but said] ‘let’s drop the pen,'” said Tomas Lundquist, head of European corporate debt capital markets at Citi, adding that “in May and early June, the level of confidence we had to get the best possible price n was not so high”.

What’s more, the rush of bond market activity over the past two pandemic years meant that “most companies had already exhausted their debt and had no imminent funding needs,” he said. .

Volvo’s decision was more opportunistic. Citi’s Lundquist, who led the deal, said the truckmaker’s timing was “very good” after U.S. inflation data came in a little more subdued than investors feared and that the company “reacted very quickly when they saw this attractive window”.

This underscored bankers’ confidence in central bank policy to support activity for the rest of the year. Investors and analysts are trying to navigate the uncertain outlook with new data releases, aiming to paint a picture of slowing inflation and predict the trajectory of major bank interest rate changes power stations.

U.S. inflation rose 8.5% year-on-year in July, a slower rise from June and a lower figure than economists had expected, raising hopes that the pace of the rise prices in the world’s largest economy have peaked.

Column chart of high-yield bond issuance (billions of dollars) showing Europe's riskiest companies are facing a debt crunch

The data has been closely watched by investors looking for clues on how much the Fed will raise interest rates to curb rapid price growth.

Markets feel ‘on a slightly stronger footing’ now compared to July, one banker said, ‘with a bit more stability and even new deals with companies in Europe [in August]. There is more optimism. »

Stock markets may be slower to rebound. The valuation of listed companies in the market frenzy over the past two years has been reduced. For example, the valuation of food delivery service Deliveroo has plunged to around £1.7bn from more than £5bn when it listed in London last year. This discouraged fund managers.

“Companies that were considering [listing] take time to see how things work out, and sellers may also need to adjust valuation expectations,” said Tom Johnson, co-head of European capital markets at Barclays.

“After a market crash, there’s always a bit of ‘who wants to be the first off the sidewalk?’ Many issuers would prefer to look at other people’s data points first.”

Debt bankers remain more positive and say they are encouraged by the recent bond market rallies. Total yields on Europe’s riskiest debt have fallen nearly 10% this year, but yields have rallied more than 6% since a low in June, according to data from ICE Bank of America. An index that tracks investment grade debt has also rallied more than 5% from the June low.

Bankers hope that a few successful deals could encourage others to get started.

“We shouldn’t underestimate the herd mentality,” said Josh Presley, managing director of Credit Suisse. “A good deal will open the door for others to follow.”

This article has been amended since publication to indicate that the bond agreement involves Volvo AB, rather than Volvo Cars

Mary I. Bruner