Deutsche Bank
DB Research
Corporate bonds in Europe
Unique combination of market drivers
offers attractive environment for corporate bond
issuers
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
Purpose
— On January 31, 2013, Deutsche Bank Research (DB Research)
published its analysis “Corporate bond issuance in Europe – Where
do we stand and where are we heading?”
— While that analysis focuses on an investors view, this presentation is
intended to apply the respective findings and analysis on an issuer’s
point of view
— Key drivers for future yield developments
— Benchmark changes versus issuer risk changes
— Timing: issuer strategy in light of market development
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
1
Boom in European corporate bond issuance
European corporate bond
issuances
Volumes of investment grade (IG) and high yield (HY)
issuances, EUR bn (left), total no. of issuances (right)
1,400
500
450
1,200
— Corporate bond issuance had a
strong showing in 2012
— Issuances 2012: EUR 388 bn (IG)
and EUR 48 bn (HY)
— Main drivers:
400
1,000
350
300
800
250
600
200
150
400
100
200
50
0
0
2000
2002
IG
2004
2006
HY
2008
2010
—
Expansionary monetary policy
—
Strong demand from investors
—
Higher funding costs leading to tighter
lending standard at some commercial
banks
— Start into 2013 has been
promising, too
2012
No. Issuance
Sources: Dealogic, DB Research
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
2
Smaller issuances are even more dynamic
— Issuances below EUR 150 m
account for 47% of deals (8.7% of
value) last year
—
—
Avg. deal size in this cohort was EUR
67 m
Corresponds better with capital needs
of large but not necessarily supersize
firms
No relief for smaller firms in the
periphery
Corporate bond issuance, investment grade
index 2000=100
400
350
300
250
200
150
— Smaller issuances outperformed
total issuances in EMU core
countries
—
Alternative source of finance when
banks apply tighter lending standards
—
Lack of mid-size issuance in EMU
periphery illustrates lack of financial
depth there
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
100
50
0
2000
2002
2004
2006
2008
2010
2012
EMU core (all deals)
EMU periphery (all deals)
EMU core (deals up to EUR 150 m)
EMU periphery (deals up to EUR 150 m)
Core: Austria, Germany, France, Netherlands
Periphery: Spain, Ireland, Italy
Sources: DB Research, Dealogic
3
Dutch corporate bond issuances
Corporate bond issuances in
Netherlands
Volumes of investment grade (IG) and high yield (HY)
issuances, EUR bn (left), total no. of issuances (right)
30
35
25
30
25
20
20
15
15
10
10
5
5
0
0
2000
2002
IG
2004
2006
HY
2008
2010
— Dutch corporate bond issuances
represent ca. 2% (issuances) / 4%
(volume) of European market
—
Less developed mid-market segment
for bonds
—
Availability of bank loans, incl. for
mid-caps, still given
— However, by-and-large, following
the trend in Europe
2012
No. Issuance
Sources: Dealogic, DB Research
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
4
Unique combination of ultra-low benchmark yields
and moderate spreads = sweet spot
Spreads reversed from crisis peak
iBoxx corp. bond spread over benchmark, bp
Left: Investment-grade ratings
Right: High yield
2,500
700
600
2,000
— Benchmark government bond
yields at historical lows
(e.g. 10y Bunds at 1.2% currently
v 3.7% l/t average)
—
Very low central bank rates
—
Ongoing recession / stagnation in
Europe = few investment alternatives
—
Safe-haven flows
500
1,500
400
300
1,000
200
500
100
0
0
01
03
AAA
05
AA
07
09
A
11
BBB
Sources: Markit, DB Research
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
13
— Spreads at moderate levels
(higher than pre-crisis but much
lower than recent peaks)
—
ESM / OMT removed tail risks
—
Rally in equity markets points towards
robust company figures
—
Strong demand from investors
searching for higher yield
HY
5
Corporate bond yields are likely to increase given
plausible scenarios
Emerging recovery
Escalation of euro debt crisis
(our baseline scenario)
(a downside scenario)
— Europe: economic recovery starts
in Q3 2013
— Benchmark government bond
yields increase:
— 10Y Bunds: +70 bp on 12M horizon
— Corporate bond spreads likely to
decrease further (illustration)*:
— iBoxx AA spreads: -12 bp
— iBoxx BBB spreads: -27 bp
— Europe plunges into even deeper
recession
— Benchmark government bond
yields collapse further:
— 10Y Bunds: -30 bp on 12M horizon
— Corporate bond spreads likely to
widen (illustration)*:
— iBoxx AA spreads: +100 bp
— iBoxx BBB spreads: +200 bp
— In each scenario, the net effect of benchmark yield and spread movement
is positive, suggesting an increase in corporate bond yields
*The development of corporate bond spreads is difficult to predict. Figures should be understood as an illustration of plausible movements.
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
6
A similar view for US corporate bonds from the Fed
Based on US stress test scenarios
— Federal Reserve has used these
scenarios for annual stress tests
of US banks.
— As in our illustration, both baseline
and downside scenarios project
increasing corporate bond yields.
Rising yields in all scenarios
US: BBB corporate bond yields under
different Fed scenarios
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
2012
2013
Baseline
2014
Adverse
2015
Severely adverse
2013 Supervisory Scenarios for Annual Stress Tests Required
under the Dodd-Frank Act Stress Testing Rules and the Capital
Plan Rule
Source: Federal Reserve
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
7
Interest-rates movement will likely dominate credit risk
— Economic recovery often triggers
positive rating drift
— A single notch upgrade translates
into a spread reduction*
Spread compression
iBoxx corp. bond spreads over benchmark, bp
AAA
AA
A
~
2 bp (starting from AA)
~
11 bp (starting from A)
~
41 bp (starting from BBB)
*Averages as per 2013 Q1
BBB
HY
0
200
2013 Q1
400
600
Avg. 2009 - 2012
Sources: Markit, DB Research
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
800
— Changes in credit risk have often
smaller impact than market moves
(barring rather low rated firms)
— The higher the initial company
rating, the stronger the impact of
market movements v credit risk
8
Summarising potential change effects
Determining potential yield effects for
issuers is driven by three factors as
described on previous slides:
Initial Rating
Scenario
AA
Emerging
recovery
BBB
Escalation
Euro debt
crisis
Emerging
recovery
Escalation
Euro debt
crisis
Yield change in benchmark bonds (1)
(1)
+70 bp
-30 bp
+70 bp
-30 bp
+
Change corporate bond spreads (2)
(2)
-12 bp
+100 bp
-27 bp
+200 bp
+
Individual names risk changes (3)
(3) one
notch
upgrade
-2 bp
-2 bp
-41 bp
-41 bp
+56 bp
+68 bp
+2 bp
+129 bp
-----------------------------------------------------=
Total yield change for issuances (4)
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
(4)
9
Summary: the pass-through of credit risk changes
and market moves depends on rating and scenario
Net effect of a one notch upgrade and potential movements in benchmark
yields / corporate bond spreads (illustration*)
Emerging recovery
Escalation of euro debt crisis
(our baseline scenario)
(a downside scenario)
AA
+56
+68
BBB
+2
+129
Initial rating
*The development of corporate bond spreads is difficult to predict. Figures should be understood as an illustration of plausible movements.
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
10
Conclusion
In our view
— Current market environment combines a unique situation of historically
low benchmark bond yields and moderate corporate bond spreads.
— Irrespective of whether the economy improves or relapses into crisis
mode, the market will likely demand higher corporate bond yields in the
future.
— In many cases, changes in market rates will outweigh the impact of
plausible improvements in individual credit risk.
— A “wait and see” strategy seems appropriate for issuers believing that the
current market situation prevails (basically a continuation of “muddling
through”) and who expect an upgrade in the individual rating.
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
11
Further reading
Kaya, Orcun und Thomas Meyer (2013).
Corporate bond issuance in Europe: Where do
we stand and where are we heading? EU
Monitor.
Available online:
http://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000000300834/Corporate+bond+issuance+in+Europe%3
A+Where+do+we+stand+and+where+are+we+heading%3F.pdf;jsessionid=D
49F103F76E130FE4E705C7E3DF9F5C7.srv-loc-dbr-com
Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
12
Disclaimer
© Copyright 2013. Deutsche Bank AG, DB Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank
Research”.
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Deutsche Bank
DB Research
Orcun Kaya, Thomas Meyer
May 2013
13