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Cycle, lamed

10 January 2013 By Dominic Elliott

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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