International Financing Review March 7 2020 1Upfront
OPINION INTERNATIONAL FINANCING REVIEWStrong and stable
W
rite off the primary bond markets at your peril.
Equities, commodities and FX have all felt the brunt of
a seismic sell-off over the past couple of weeks thanks to the
spread of the novel coronavirus.
'OVERNMENTûBONDSûWEREûTHEûBIGûBENElCIARYûASûINVESTORSû
sought safety, with the yield on the 10-year Treasury falling
BELOWûûFORûTHEûlRSTûTIMEûINûHISTORY
Even credit has held up relatively well. Sure, lower-rated
paper has taken a bit of a beating – but products such as AT
and high-yield were trading at such tight levels they were
long overdue a correction.
Higher up the ratings spectrum, the underlying technicals
have remained intact.
Spreads have widened in Europe but only back to where
they were (on average) in September when primary markets
were thriving.
And in yield terms, bonds are trading at lower levels than
where they were before the sell-off.
So it wasn’t a great surprise to see the investment-grade
primary market on both sides of the Atlantic get back online
once the headlines allowed.
And yet what happened in primary last week was still
REMARKABLEû$ESPITEûTHEûMARKETûBRIEmYûGOINGûINTOûPANICû
mode soon after the US Federal Reserve announced an
emergency 50bp rate cut on Tuesday, new bond deals got
done without a hitch.
4HEûFOLLOWINGûDAYûSUPPLYûWASûINûFULLûSWINGûWITHûlVEû
investment-grade issuers in the euro market and 13 in the US.
In Europe, all the deals were priced with new issue
concessions of 5bp or less. It was as if the trauma of the week
before had never happened.
So while ECM bankers in Europe say it may be several
weeks before IPOs get going again, the debt capital markets
have already shown they can quickly get back in the groove.Mind the gap
O
f course, none of this means that there aren’t tests ahead for
the credit markets.
In particular, we may soon get a greater insight into a
QUESTIONûTHATûHASûBEENûTROUBLINGûREGULATORSûANDûTHEûlNANCEû
industry for years: can corporate bond markets withstand a
sustained wave of selling pressure without buckling and
sparking a systemic crisis?
The early evidence was encouraging. At the end of
February, high-yield bonds had their worst week in nearly a
decade and billions of dollars drained out of high-yield funds.
But that was accompanied by record trading volumes in
credit-default swaps and high-yield bonds, as well as
MONSTROUSûmOWSûINûlXED
INCOMEû%4&S ûSUGGESTINGûMARKETSû
were more or less holding up.
There were, however, signs that trading conditions were
growing increasingly fragile on Friday, when European high-
yield CDS spreads jumped to their highest level since
MID
ûFOLLOWINGûANOTHERûMASSIVEûROUNDûOFûFUNDûOUTmOWSTraders said they were starting to see large gapping in
some prices and dislocations becoming more commonplace.
There is no indication that funds offering investors daily
ACCESSûTOûTHEIRûMONEYûAREûFACINGûDIFlCULTIESûRAISINGûENOUGHû
cash to meet redemptions, although the longer this goes on,
the more likely such problems become.
The precarious state of bond market liquidity has been
such a major talking point over the past several years that
fund managers should be ready to weather such market
storms.
,ETSûHOPEûSO ûBECAUSEûWEûMIGHTûBEûABOUTûTOûlNDûOUTûHOWû
well-prepared they are.Resilience rewarded
I
Fû!SIASûEXPERIENCEûSOûFARûISûANYûGUIDE ûTHEûGLOBALûSPREADûOFû
the coronavirus means bankers everywhere are in for a
frustrating few weeks.
/FlCESûINûTHEûREGIONûHAVEûREMAINEDûOPENûFORûBUSINESSû
throughout the crisis, and – encouragingly – deals have still
gone ahead. But with many employees working at home or
INûBACKUPûOFlCES ûTHEûATMOSPHEREûISûFARûFROMûNORMAL
Moans about face masks are growing louder, especially in
OFlCESûWHEREûTHEYûAREûMANDATORYû#OVERINGûUPûFORûAûSHORTû
train ride is one thing; eight hours of constant adjustments
to avoid fogging up one’s glasses is quite another.
Most teams are split in two to avoid the risk of whole
departments falling sick, with the result that many
colleagues have not seen each other in person since January.
That said, there is a sense of admiration for the ability of
places like Hong Kong and China to carry on with business
without accelerating the spread of the disease. It may turn
out to be a lull in the storm, but new cases in China do
appear to have slowed considerably.
)NDEED û!SIASûlNANCIALûHUBSûAREûSLOWLYûGETTINGûBACKûTOû
business as usual just as panic levels are rising in Europe and the
53û2ESTAURANTSûINû(ONGû+ONGûAREûlLLINGûUPûAGAINûDURINGûTHEû
lunch rush, and more families are venturing out at the
weekends. Open air activities, such as hiking, are top of the list.
The Hong Kong Golf Club is unusually busy during weekdays.
Travel restrictions are by far the biggest source of
frustration. Technology has made it possible to do a lot of
things remotely, but bankers worry they are losing valuable
face time with their clients.
The upside – if there is one – is that Asia’s ability to
withstand this crisis will only highlight the region’s
resilience and adaptability.
Asian companies are now predominantly funded by Asian
investors, allowing capital markets to remain open even
when US funds are running scared. Plenty of emerging-
market funds are showing their ability to take a long-term
VIEW ûNOTABLYûONûTHEû3")û#ARDSûmOATûINû)NDIA ûWHEREûTHEû
institutional order book reached a 10-year high.
As the coronavirus continues to spread, it is clear that nowhere
INûTHEûlNANCIALûMARKETSûWILLûBEûIMMUNEûTOûITSûEFFECTSû7HENû
INVESTORSûDOûlNALLYûTURNûTHEIRûATTENTIONûTOûSIGNSûOFûRECOVERY û
however, Asia’s resilience should stand it in good stead.2 IFR Upfront 2323 p 1 - 2 .indd 1 06 / 03 / 2020 19 : 10 : 09