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The balance of power between fixed income investors and bond underwriters is shifting towards the latter with bankers keen to use the best conditions since 2010 to push the market's boundaries. Beefy order books, low yields and slim new issue premiums -- coupled with new liquidity from ECB's second LTRO -- are encouraging unrated issuers and companies to take the plunge. Unrated Finnish media group Sanoma announced it would be meeting investors ahead of a potential transaction next week, while market sources are saying that Polish energy company Energa is preparing its debut issue in the international market. So far this year, only one first-time issuer has graced the European investment grade market -- Dutch energy company Enexis at the end of January -- and no unrated credits. "The market has taken another big shot in the arm with the LTRO. It has had a direct impact on sovereigns and financials and this has inevitably spilled over into sentiment for other asset classes, like corporates," Brendon Moran, co-head of corporate origination at Societe Generale said. "With the bullish tone remaining strong, unrated names, that naturally tend to be more nervous about accessing the market, should use this market windows an opportunity," he added. Dominic Kerr, managing director for corporate origination at HSBC, points out that we have already witnessed a return of high-yield issuers and securitisation deals. "Seeing unrated companies test the market is just the next natural step." ANYTHING GOES Linklaters partner and capital finance specialist Nigel Pridmore also points out that the desire to diversify away from reliance on bank funding could once again be a force driving unrated and debut issuers to the market. "I expect to see some structuring of products to suit individual investor demand. This might include private convertible bonds or hybrids," he said. And bankers are starting to identify candidates who might be willing and able to sell hybrids in particular. "I could imagine some utilities like Vattenfall toying with the idea of a hybrid," one syndicate banker said. The last hybrid bond to be issued in the European market was a EUR750m 60.5NC 5.5-year bond issued by German utility EnBW last October. It priced in-line with guidance to yield 7.5%, equivalent to mid-swaps plus 540.1bp and was trading around mid-swaps plus 518bp on Friday. This tightening though, has failed to encourage other borrowers from executing similar transaction. "They are riskier than straightforward bonds, they require longer lead times and therefore issuers will look for market windows of several weeks rather than just several days. But they do have a lot of advantages," a second syndicate banker said. Hybrids' equity-like qualities help bolster corporate balance sheets and can aid them to maintain credit ratings. "As each day passes, we see the market becoming more willing to experiment – a fact reflected in the rise in high-yield activity not only in the US but also over here in Europe," Societe Generale's Moran said. Even though he does not consider hybrids to be ideal for everyone, he does think that some corporates will be mulling the option of doing one. "I think the motto now is certainly 'print while you can'. It's game on for everything." WINNING INVESTORS OVER Hakan Wohlin, global head of debt origination at Deutsche Bank, also said that the sentiment will encourage more liability management exercises and pre-financing operations. And in high-yield, Wohlin said he expected that greater risk appetite could be reflected in portfolio companies and corporates increasing their leverage and potentially adding additional layers in the capital structure. Other bankers also highlight the growing popularity of long-dated bonds which inevitably carry more risk. The average maturity for euro-denominated investment-grade corporate bonds issued in the first two of 2012 was around 4.5 years while the average maturity over the last two weeks has been just short of seven years. When asked, however, investors still seemed cautious -- for the time being at least. "The current rally reflects improved market confidence in the wake of the LTRO and Greece’s avoidance – for the time being – of a disorderly default," Duncan Sankey, partner, portfolio director and head of credit research at Cheyne Capital Management said. "There is still plenty of scope for macro shocks both within and without Europe, which could close down access to the European high-yield market in short order," he added. Jens Vanbrabant, lead portfolio manager at European Credit Management, agrees. "I do expect that we might see some less conservative bonds come to the market, such as bonds from unrated corporates or from newcomers to the market," he said. "At ECM, however, our appetite for riskier bonds has not increased. "This does not mean that we would dismiss riskier bonds, it just means that we prefer to err on the side of caution," he said. Find out more about companies mentioned in this article such as Cheyne Capital or read the full article here
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