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Monday, 21 April 2014

Cycle, lamed

This time it's different for capital-markets cycle

History rhymes, even in the capital markets. Global issuance in three major asset classes seems to follow a pattern after a financial crisis, Thomson Reuters data shows. And many equities bankers think it’s happening again. First there was a recovery in investment-grade debt. Then junk bonds picked up. If previous cycles are any guide, this year should see a revival in initial public offerings.

In the wake of 1989 and 2001 - the years of Black Monday and the bursting of the dot-com bubble - global corporate investment-grade issuance slumped year-on-year but it was back to pre-crisis highs in 1991 and 2003 respectively. In both eras, corporate high-yield debt was the next stitch in the thread: issuance recovered in 1992 and 2003. And IPO issuance surpassed pre-crisis high-water marks in 1993 and 2004.

Yet the template is less perfect for the most recent financial crisis, which has been more severe. Investment-grade issuance may be up from its crisis nadir, but it remains below its 2007 peak. By contrast, junk-bond issuance has rebounded faster than in the periods after 1989 and 2001, and was breaking new records in 2009. Last year, high-yield issuance was double its pre-crisis level, at $369 billion.

This uneven fit hasn’t stopped many capital-markets bankers betting that the fundraising cycle is undergoing a predictable turn and an IPO comeback looms this year. There are good reasons to suppose that is wrong. The junk bond love-in could well endure a good while longer given that yields on even 10-year gilts, Bunds and U.S. Treasuries are all negative in real terms. And while the equity market is ticking up, that isn’t a sufficient condition for investors to be comfortable with taking the risk on buying new issues.

There’s no obvious bubble in high-yield yet. Moody’s data shows global default rates were at 2.6 percent last year, well below the 4.8 percent historical average. That makes it look a safer bet as an asset class than shares in newly listed companies. Nor is there an obvious source of demand for more equity investments either: global demographic trends mean there will be no rise in the age-group most associated with equities investing - 35-50 year-olds - until about 2015 at the earliest, according to research by BNP Paribas.

Equities bankers can expect the occasional bank rights issue or M&A-related financing. But an IPO boom may have to wait.

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Thomson Reuters data shows a pattern of slump and recovery in global capital markets issuance following the years 1989, 2001 and 2007, when the last three financial crises first took root.

Investment grade corporate bonds were among the first major asset classes to rebound from crisis lows, according to the data. After the crisis years of 1989 and 2001, the proceeds from global investment grade corporate bonds fell year-on-year, but then recovered to above pre-crisis levels at the end of the following 12 months.

In 2008, investment grade debt slumped 18 percent on the previous year’s volumes, but rose the following year. However, investment grade debt issuance is still short of its pre-crisis high.

The snap back in investment grade issuance has historically been followed by a rebound in high-yield debt. Global high-yield issuance returned to above pre-crisis levels in 1992 and 2003. It recovered to just above pre-crisis levels in 2009 before almost doubling to reach $330 billion in 2010.

A year after high-yield debt issuance revived following the years of 1989 and 2001, initial public offerings followed suit. Global IPO volumes surpassed pre-crisis highs in 1993 and 2004. However, global proceeds from IPOs have yet to attain the level they reached prior to the latest crisis and at the end of 2012 were still 65 percent below their pre-crisis peak.

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