Unrated bond issues double in Europe

August 1, 2013 5:11 pm

Unrated bond issues double in Europe

By Christopher Thompson

The number of European companies without investment ratings tapping capital markets for funding has doubled as investors throw caution to the wind in their hunt for yield.

Bond issuance by unrated companies -–or those without investment ratings which measure credit quality – has totalled about €108bn since the beginning of 2010, driven by yield-hungry investors, low interest rates and a dearth of bank finance, according to research by Fitch.On average, unrated issuance has accounted for a tenth of overall European corporate bonds over the past three years, with much of the volume driven by first-time issuers, typically small and medium-sized enterprises.

“As a portion of the overall bond market, unrated issuance has almost doubled in the past few years [compared to before 2010] and it’s a lot of first-time issuers,” said Tom Chruszcz, a director at Fitch. “Yields have been very attractive to borrowers and banks were cutting back to SMEs in particular [so] in some respects they were driven to it.”

More than half of unrated issuance consisted of bonds under €100m, a relatively small size compared to rated companies, while the average bond is €157m.

Only four bonds were valued at more than €1bn, all raised by SAP AG, the German software company. Italy’s Barilla, Finland’s Finnair, Germany’s Sixt and France’s Air France have issued unrated bonds, too. But there could be longer-term risks for investors.

“Will it come back to bite investors?” said Mr Chruszcz. “It remains to be seen … you get the feeling there was a certain amount of froth generated in terms of companies coming to the market because they could.”

Unrated issuance has been heavily biased towards those domiciled in the eurozone’s biggest economies – France and Germany – as well as perceived safe havens such as Norway, Switzerland and the UK. Mr Chruszcz said he did not expect volumes to grow significantly in the future.

“Most asset managers are limited by their mandates in how much [unrated bonds] they can take on, so you’re left with retail investors who make up a much smaller portion of the overall investors’ pool,” he said.

The flurry of unrated issuance adds further ballast to the loan-to-bond shift in Europe, bolstered by the Basel III global banking regulations, which force banks around the world to hold more capital against loans, leading to higher rates and less lending.

Companies are also attracted by the steep fall in borrowing costs on the back of central bank action, particularly since the European Central Bank calmed markets last year with its pledge to do “whatever it takes” to save the euro.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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