Monetary policy actions taken by the Bank of England (BoE) following the EU referendum have generated a significant opportunity for corporate Britain to borrow long-term funds at historically low rates. This provides companies with the ability to lock in some of the fuel needed to drive growth of their businesses and the wider economy for the medium term.
After the world woke on 24 June, to news that the UK had voted to leave the EU, the yield on UK government bonds (“Gilts”) fell sharply following the familiar “flight to quality” in times of economic uncertainty. In a market landscape already shaped by historically low financing rates and resulting low returns for investors, both were pushed down even further.
The decision from the Bank of England (BoE) to cut the base rate to 0.25 percent was widely expected. However, the accompanying announcement that the BoE would purchase £10 billion of corporate bonds alongside government debt purchases of £60 billion had not been fully priced in by the market, despite the rumours that it might occur. The result was both significant and immediate, with a swell of activity in the Sterling corporate bond market as Gilt yields fell further and credit spreads dropped markedly.
Vodafone issued a £1 billion, 40-year bond the day after the BoE’s announcement that priced well within the issuer’s 33-year bond, which was issued only a few days previously. This was quickly followed by BMW and BP transacting big ticket issuances of £600 million and £650 million, respectively.
Issuers that had been planning to access the Euro denominated bond market and swap proceeds back into Sterling to pick up the arbitrage, were opportunistically rethinking their options given the suddenly lower relative cost of issuing directly in Sterling.
Places for People’s £400 million bond continued the flurry of corporate Sterling issuance. Corporate bonds totalling £3 billion were issued in August compared with £8.6 billion in the rest of 2016, according to Dealogic.
There was some concern that the Sterling market may get indigestion from an ongoing wave of issuance, but this has not proved to be the case.
Sterling investment grade bonds have not seen any significant change in spread levels since the lows experienced directly after the BoE announcement, yet there has not been the flow of new issuance that many expected, given the historically low cost.
There is no indication from the secondary market that the attractive conditions in the primary market should be abating. For pension fund investors, the sustained reduction in Gilt yields is exacerbating deficits, increasing their requirements to invest to keep returns up and match assets and liabilities. With supply so far relatively limited, investor demand should remain creating attractive conditions for those borrowers that seize the opportunity.
Furthermore, investors in Sterling denominated bonds have historically been predominantly UK institutions. In recent times, European institutional investors have been increasing participation in new Sterling issuances - adding to competitiveness.
As we move out of the summer lull, September should provide a clearer indication of corporate appetite to bring supply to the market and meet investor demand.
Alongside the recent changes in public bond market conditions, there has also been a strong indication of similar movements in the private placement market for UK borrowers. There is transactional evidence of high investor competition, driving lower coupons and creating increasingly borrower-friendly conditions for strong credits who, primarily due to size of balance sheet or debt requirement, cannot easily access public bond markets.
The key test for Sterling debt capital markets will be whether corporates can get comfortable with taking on additional, long-term financing while uncertainty remains in the economy following the Brexit decision.
For existing issuers with near to medium term financing or refinancing requirements, it appears to be an easy call and for new issuers looking to access the Sterling debt capital markets, conditions have rarely been as favourable.