3. Even with the prospect of rising
interest rates in the U.S., however,
refinancing risk will remain low
for investment-grade corporates
for three reasons.
First, the increases look set to follow
a gradual path. The Federal Reserve’s
own projections imply rates around
2.5% by the end of 2017 and 3.5%
over the longer term – still far lower
than the peaks seen over the past
few decades.
In Europe a further round of
quantitative easing was ushered in
last year, increasing the volume of
cheap debt available for corporates.
Meanwhile the UK looks set to hold
off a little longer before it begins to
raise its rates.
No matter how you look at it, it will be
a long-time before corporates have to
worry about interest rates approaching
5%, as they were pre-crisis.
U.S. interest rate history and FOMC projections
0
1
2
3
4
5
6
7
201820162014201220102008200620042002
%
FOMC participants
median projection
for Fed Funds
Target Rate
Source: Bloomberg, Federal reserve
Fed Funds
Target Rate
www.allenovery.com
3
5. One post-crisis trend the 2015
M&A-fuelled boom in short-term
finance has reversed is the primacy of
bonds in the investment grade market.
Pre-financial crisis the value of loans
was double the value of bonds. As the
credit crunch of 2007 gave way to a
full financial crisis, markets dislocated
and investment grade corporates
turned to bonds to meet their funding
needs in record numbers.
Over the past three years the volatile
post-crisis relationship between loans
and bonds, looks to have settled with
the value of bond issues and loans to
investment grade borrowers stabilising
to a position of parity.
If, as anticipated, the short-term bridge
loans used to fund the M&A boom are
refinanced in the bond markets during
2016, bonds will most likely take pole
position again. But the difference in
value between loans and bonds will
likely remain small.
Market currents continue to fluctuate
depending on which prevailing events
and conditions have the strongest pull
on the tidal flow of funds. But one
thing is clear – corporates have
options and are willing to use any
and all of them as necessary.
Investment grade financing – global (USDm)
0
500,000
1,000,000
1,500,000
2,000,000
Bonds
Loans
2015201420132012201120102009200820072006
Loans
Bonds
www.allenovery.com
5
7. Technology and healthcare will drive IPO market in 2016
Initial public offerings (IPOs) got off to a strong start in 2015,
but momentum slowed, largely as a result of the volatility in
China during summer 2015 and the ease of raising private
funding in the U.S. – proceeds from IPOs in Asia Pacific
(excluding Japan) halved in 2015 from 2014 levels and
IPOs in the Americas were down 35%. While still well below
2006-2007 levels, Europe was by contrast a relative bright
spot – only down 9% year-on-year. Last year’s total included
the successful completion of a number of deals postponed
from the end of 2014 and a handful of large privatisations of
state-owned assets, such as the IPO of Spain’s airports
operator Aena. Activity also included a high proportion of
private equity exits, continuing a trend from 2014.
This proportion is now declining as the pipeline of good
private-equity assets that are ready for IPO shrinks. With fewer
large private equity and state-owned assets likely to come to
market, 2016 is likely to see a greater focus on mid-cap floats.
There is a significant pipeline of smaller technology companies
yet to come to market, and healthcare may also prove a
popular sector.
Is liquidity a risk for the high-yield market?
One potential concern for the U.S. high-yield bond market is
that issuance has grown at a time when the ability of banks to
act as market makers in corporate bonds has been curtailed.
In the past, banks’ bond trading desks have been willing to
hold substantial inventories of corporate bonds, allowing them
to perform a stabilising role during periods of market turmoil.
But new regulations such as the such as Dodd Frank have
made it more expensive to hold these instruments and bond
inventories have consequently declined sharply in recent years.
If investors were to exit the high-yield market due to rising rates
or increased defaults, the fear is that liquidity could suffer since
banks would be unable to fulfil their traditional role. A report by
Invesco notes that the inventory of U.S. corporate bonds held
by primary dealers has declined from a peak holding of about
10% of the market in July 2007 to just over 1% in 2015.
While this does not appear to be an immediate threat, it is
an illustration of how regulatory changes aimed at reducing
risks could have unpredictable consequences.
www.allenovery.com
7
9. 0
50,000
100,000
150,000
200,000
250,000
Bonds
Loans
20202019201820172016
Bonds
Loans
0
100,000
200,000
300,000
400,000
500,000
600,000
Equity
Bonds
Loans
2015201420132012201120102009200820072006
Loans
Bonds
Equity
Asia Pacific (excluding Central Asia and Japan)
Corporate funding by source (USDm)
Corporate funding maturity by source (USDm)
There was a decline across all funding categories in
Asia excluding Japan, reflecting slower economic growth
across the region. The decline was greatest in bonds, where
issuance fell 40%, reversing the 40% increase seen in 2014
during exceptionally strong year for investment-grade
bonds. However, 2015’s total of USD320bn was still the
second-highest on record and bonds accounted for more
than 35% of corporate funding, compared to less than 20%
10 years ago. While equity was relatively flat year-on-year,
this masks the drop-off in IPOs mentioned earlier, which
fell by 48%, while follow-on offerings increased by 24%
to the highest level of USD171bn. More than USD200bn
of outstanding bonds mature in both 2016 and 2017,
the only region where the volume of bonds to be
refinanced exceeds the volume of loans.
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9
