The future of Brexit – how or whether it will happen – has not been sealed yet but the six-month extension granted to Theresa May’s administration by the European Union could turn out to be a capital markets opportunity. This can already be seen as the U.K. companies are back with new debt sales. To capitalise the opportunity presented by the extension, companies have started raising funds from the market after staying away for months. While 8 borrowers had raised capital worth about £2.8 billion via bonds in the same period last year, in contrast, two borrowers have raised a total of 452 million pound-equivalent in bonds this year.
On 23rd April, London-based bookmaker William Hill PLC announced its plan to raise GBP 375 mn through senior unsecured notes due in 2026. Moody’s has assigned Ba1 rating to the proposed issue. Tesco PLC, a British multinational groceries and general merchandise retailer, also announced its intention to issue new sterling-denominated notes of the same amount. EG Group (independent fuel station and convenience retailer) also planned to float GBP 1.35 bn bonds equivalent denominated in euros and dollars.
The expectation of short-term market worries about a disorderly exit has been staved off for now as the European Union leaders earlier this month agreed to postpone UK’s departure until the end of October, helping to call the market sentiments. In the past few months, as Brexit wreaked havoc, investors and corporates had avoided the bond market, and companies had found other avenues to raise funds to beat the uncertainty from Brexit.
However, in contrast to corporate bond sales in Euros, which rose over 50 per cent in the first quarter, bond sales in sterling, which are 30 per cent higher, have not experienced an enormous upswing. Aston Martin, earlier this month, had skirted the market and privately placed $190 million senior secured notes due in 2022. Meanwhile, Co-operative Group Ltd had tapped its relationship banks to obtain a liquidity facility worth €180 million. However, Jaguar Land Rover explored other financial market alternatives as it was difficult to access bond markets as stated in February. Last year, Victoria PLC had also cancelled a planned deal due to expensive costs of funding.
The new sterling-denominated corporate debt sales present an excellent opportunity for investors as the search for high yield is the overriding theme for bond investors this year as treasury yields around the developed market trade near their record lows. Moreover, market fundamentals are in an excellent shape: until there is certainty on how the economy will be affected by any resolution to Brexit, the Bank of England is unlikely to raise rates, and the pound is stable versus other major currencies. This assists in managing foreign-exchange risks and plan future funding costs. Additionally, in line with the U.S. and Europe, credit spreads relative to benchmark government debt have also tightened.
Though the benchmark treasury bond yields have increased this month, they are still considerably less than the levels touched six months ago, helping to lower the issuance costs for corporate borrowers. As some near-term uncertainty has been alleviated by the delay to Brexit day, the strong pace of sales is expected to continue in the second quarter of the year. Although bond yields have started to back up and any adverse political event could hit corporate issuance volumes and spreads, investor demand is hot as the hunt for yield is in full swing.
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