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What De-Leveraging? ECB QE To Drive $600 Billion in New Issuance
On Wednesday we highlighted the fact that US corporations issued a record amount of debt in Q1 with high grade supply coming in at $348 billion while issuance for the month of March tied a 2008 record at $143 billion. Explaining this debt bonanza, we noted that “struggling oil producers tapped HY markets to stay afloat, companies scrambled to max out the stock-buyback-via-balance-sheet re-leveraging play before a certain “diminutive” superwoman in the Eccles Building decides to do the unthinkable and actually hike rates, and then there was M&A.” We also discussed how successive rounds of QE in the US served to boost HY issuance by some 50% above the historical average:
Now UBS is out calling for a similar dynamic in Europe as the ECB’s €1 trillion plus in asset purchases should drive demand for corporate credit as yields on sovereign debt and SSAs are driven relentlessly lower. The bank is now forecasting €600 billion in supply for 2015, up a fifth from last year with €300 billion in HY.
Via UBS:
The European credit markets have seen prolific issuance since the ECB announced its QE program in January, catching many off-guard. The reverberations have not been limited to credit; the Eurostoxx is currently up 18% YTD in local terms (ZH: i.e. decreasing leverage for Greece), and remains up 5% YTD in USD, demonstrating a renewed marked belief that QE may be enough to shake Europe out of its doldrums. We believe the story of Q1 is not an aberration, but a trend. We are now forecasting EUR corporate issuance of €600bn (+20% Y/Y) in 2015, with much of the growth coming from non-financials. HY issuance should total €100bn (+28% Y/Y) and IG non-fin issuance should total €275bn (+22% Y/Y), with potential upside of €140bn & €300bn if Europe follows closer to the US roadmap around QE. The impact on European equities should also be substantial as M&A activity picks up.
Indeed Q1 witnessed a dramatic Y/Y increase in EU IG issuance, with supply up 41%...
...while issuers took advantage of an opportunity to extend maturity profiles and capitalize on movements in the EURUSD:
In short, IG corporates have been terming out debt (51% of total issuance has come in maturities of 10y+) and optimising their capital structures (corporate hybrid issuance up 28% YoY to €14bn). Importantly, issuance volumes have been particularly high because of the activity from US issuers. A slew of reverse Yankee deals (US corporates issuing in euros) hit the market in Q1, accounting for 28% of EUR IG non-financial issuance as US corporates took advantage of lower currency adjusted spreads in Euros vs dollars.
Q1 saw a remarkable 73% Y/Y increase in HY issuance...
...which of course suggest that eventually the credit quality of issuers will invariably decline as yields are driven lower and investors are forced to ante up on risk in order to squeeze out a few extra basis points in yield…
€30bn worth of bonds were issued in 1Q15, up 73% YoY which puts 2015 in a position to set a new record for issuance. That said, despite these large issuance volumes quality has not deteriorated. On the contrary, the ratings mix has improved vs 2013 and 2014 with BB and split BB/B rated issuers accounting for 60% of the issuance (vs less than 50% in the prior two years). Interestingly in the US we saw the opposite dynamic with QE generally leading to a deterioration in the credit quality of new issues. This is not so surprising to us. Indeed, QE has only been announced recently in Europe and lower quality high yield remains a hazardous area in the eyes of a number of investors given last year’s poor second half performance. However, credit quality could drop ultimately as confidence in the high yield asset class strengthens.
…and with HY issuers incentivized to refinance at artificially suppressed rates…
* * *
So summing up, that's €600 billion in new euro issuance and a record €100-140 billion in HY from companies looking to refinance. Given that, we come back to what has become a familiar question in a world where rock-bottom yields create insatiable demand for corporate debt but in which new regulations discourage banks from market making: what happens when some "accident" or exogenous shock or tail event sends everyone in the secondary market charging for the door all at once and there's no one there to provide any liquidity?
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Tail event? Pah! Bring out the $10 Trillion ECB program!
When the "money" is "free" there are no limits!
Euro will become worthless before King Dollar.
Well on its way.
Tickmill made a call that EUR/USD will drop swiftly to 1.03/1.04 level when the Greek default is official. It will then be followed by a mother of all short squeezes which would take the pair to 1.15/1.17 level in couple of weeks. Days not weeks left to the event.
Euro is on a one way ride to 80 cents or below.
Wrong. The usd is going lower, as hot money flows back over to European markets and Asian markets when China starts to ease again over the next several months.
The only reason the $usd has strengthened is because of liquidity issues and safe haven flows. The US equity markets are topping out, and bond yields will continue to move lower.
If you mean this Tickmill then as an ECN broker why would they care where the markets go, they make money on commissions so the more volatility there is the more people trade and the more commissions they earn. These days it is good to be a broker.
what happens when some "accident" or exogenous shock or tail event sends everyone in the secondary market charging for the door all at once and there's no one there to provide any liquidity?
Two things -
1 - global credit / debt creation (flow) even with ECB and BOJ and potentially BOC all QE'ing isn't nearly enough to offset the declining rate of net global credit issuance (household and financial rates declining...and not enough gov and corporate to offset)...so net net, not enough credit to keep up anticipated credit driven levels of demand.
http://econimica.blogspot.com/2015/03/are-seeds-of-depression-sprouting.html
2- Post '08-'09, is there really a day we doubt the CB's will fail to provide the liquidity...by hook or by crook?
http://econimica.blogspot.com/2015/03/brics-blink-or-more-correctly-wink-and.html
Even a small bond panic will drive liquidity to zero and then the fun starts and the CB's, led by the Fed, will proceed to make things much worse. We'll get an honest market when the old one is dead and buried.....
Good Lord! The European bond market is completely different from the U.S. bond market. The primary reason sovereign European bond yields are so low is because of their under~developed corporate bond market.
The European banks and Financial Institutions function much differently than in the states.They're just extentions of the various governments debt obligations, and conduits for money flows and sovereign liquidity.
I see the potential for massive abuse, laxed regulations. These fuckers are in " slash and burn" mode now.
It really is deleveraging because it's all funny money and so it don't "count"*
-Paul Krugman "Ideas I had With My Head Up My Ass"
lol. The euro was just flirting with 10-12 year lows, the European bources are at record highs, and European sovereign bond yields are at all time lows. What could go wrong?
The idea is self defeating. If the ECB allows and buys corporate bond issuance, the euro will strengthen from demand, and that will "by proxy" destroy any nominal gains from the weaker currency.
From day one I have said that these bankers/financiers are using the "Sheriff Bart" trick from the movie "Blazing Saddles" Any more opposition from the sheep and these fuckers will kill themselves...
Well, I keep hoping...
... and the guillotine grows hungrier by the second.
LoP you couldn't be more correct. These guys are so busy covering their lies by telling more lies, that their lies are actually starting to become truths.
I call it the "spin cycle" syndrome. The lies start to beget the lies so rapidly that the investors can't adjust fast enough, and start to question the liars. The discomfort of uncertainty starts to outwiegh the monetary party benefits.
The "spin cycle" is usually followed by the cascade event. This is when the proverbial Kyle Bass > super highway, becomes a goat trail.
Just imagine 50 people trying to fit through a keyhole.
when some "accident" or exogenous shock or tail event sends everyone in the secondary market charging for the door all at once and there's no one there to provide any liquidity?
No need for that. Chicagah, Calipornia, and hundreds of others will implode soon enough from unfunded liabilities and fraudulent accounting. Negative cash flow eventually forces real change.
What was the intended goal of QE? Interest rates go down and then... something happens.
fed qe assisted emerging markets. It also lured 9 trillion of loans that now have to be paid back in dollars, they assumed fed would continue endless qe?, interest rate hike will hurt them. IMF was the rescue agent decades ago, time for a repeat? IFM does have tough small print. The need for dollars to repay those loans ..........
didn't you know you deleverage a ballon by blowing it up!
Awesome, paging ghordius, please pick up the white courtesy phone and shove it up you ass.
cranky again?
Yen Cross above is 100% correct. Bond market here is different, as well as the banking systems. Effects might not turn out comparable. Note his comment about "conduits", it's insightful
and I'd prefer to KEEP those commercial bond markets "underdeveloped", thank you very much
it's a currency war. tides and lows, until the losers give up. the trick is about withstand the stresses caused by the war
you are for sure old enough to remember the last "armistice", aren't you