The re-opening of the primary debt market for companies on both sides of the Atlantic, from which companies in the high yield segment also benefit, is good news given that it shows the reduction of investors’s fears and, more important, means a respite for the companies able to access again market financing. In fact, this last point will have been behind the Fed´s step backwards. The primary high yield market in the US accumulate 41 days without operations, the longest drought in the registers of Dealogic, which began in 1995.
The positive aspect of the re-opening of the US primary high yield market, at the hands of the gas pope company Targa Resources, was not only an event in itself, but also could feel a significant appetite from investors. In the beginning, the company planned to place 750 million$ at 8.5 years, but the strength of demand lead it to place an additional 750 million$ at 10 years.
In the concrete case examined, it should be recognised that the recovery of oils prices and the stabilisation of natural gas prices, thanks to the combination of reduced fears about global activity, speculation that Saudi Arabia will cut crude and the real levels of Iranian oil exports because of sanctions, have been key.
The reactivation of primary debt markets and, in particular, of the interest in segments like high yield would not have been possible without the messages emerging from the Federal Reserve, emphasising patience in the timing of interest rate hikes and, even, open the door to adjustments to the rhythm in adjusting its balance sheet.
The re-opening of the primary high yield market in the US was one of the latest highlights in the change in global sentiment mentioned above, but not the only one given that we have also seen others like the brewer Anheuser-Busch InBev Worldwide which was able to place 15.5 billion$ of debt in just one day. The Belgian company exemplified the re-opening of the primary debt market for European companies, which also extended to the high yield segment and emissions in sterling. In the first case, the re-opening was led by Telecom Italia, in this way collaborating in creating one of the best weeks for emissions of corporate debt in Europe in recent months.
The reduced anxiety also allowed Saudi Arabia to capture 7.5 billion$ through the emission of two benchmark bonds for 2029 and 2050 which counted on a demand for 27 billion$. The country easily bypassed the obstacles derived from the political noise, the risks emerging from its war in Yemen and, even, the debatable health of its public finances. Finances which suffered a step backwards when the oil prices conflicted with the country’s plans to increase public spending 7% in 2019.
Saudi Arabia’s plans aim to reduce the deficit from 4.2% of GDP in the current financial year to achieve balance by 2023. The issue is that, in the short term, there are reasons for raising reasonable doubts about this challenge and, probably, public debt, which will end 2018 at 19.1% of GDP will end up exceeding the objective of 21.7% in 2019. Therefore, the Saudis will have to return to the markets repeatedly and this increases the risk that they will have to turn to their sovereign funds. However, the positive news lies in that, at the moment, window of market liquidity reduces this risk and at, in turn, is good for the is good for the markets, given that it reduced the possibility that the Saudis will have to face a forced sale of some of the financial assets in the hands of its funds.
The re-opening of primary debt markets at global level is good news, although we should beware proclaiming victory and maintain a critical vision in the medium term looking at certain risks over-flying the debt market.
For example, BIS data show an increase in zombie companies maintained by the generosity of the monetary policy of the major central banks. Such companies are defined as those whose debt servicing costs cannot be covered by their earnings over a prolonged period of time. Such companies, in the main developed countries, have increased to a little over 12% of the total, if we use a broad definition, and around 6% with a more restrictive definition. The increase in zombie companies is the most extreme example of a generalised deterioration in the quality debt. In Europe, based on data collected by the IMF, the percentage of debt rated BBB over the total of investment grade debt has gone from minimal at the beginning of the century to about 50%. A situation that differs from that observed in the US, where it began from higher levels, even if recent years have also produced a progressive upwards trend. For example, according to Bank of America data, the net volume of corporate debt downgraded from -A to BBB reached 115 billion$ in 2018, compared to the loer figure of 1 billion$ in 2017.
In a world where BBB ratings are more abundant in the past, we cannot ignore the risk that companies will more frequently fall outside investment grade.