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UK’s corporate bond market takes off after Brexit

Sterling corporate bond market has shrugged off fears after last year's Brexit vote with record five months of issuance, says Sajiv Vaid of Fidelity.

UK’s corporate bond market takes off after Brexit

The UK’s plans to exit the European Union and the pound’s subsequent decline have done little to dent the sterling corporate bond market.

Non-financial sterling corporate bond issuance has trebled between April to August, according to Fidelity International.

The fund management group noted that sterling-denominated investment grade corporate bond issuance stood at £22.3 billion during the period, which compares to £7.1 billion over the same period last year.

‘One accusation levelled at the sterling market in the past has been the inability of large corporates to issue in “size”, compared to dollar and euro equivalents, and the lack of liquidity thereafter’ said Sajiv Vaid, manager of the Fidelity MoneyBuilder Income fund .

‘Contrary to this, in the last year we have seen some blockbuster multi-tranche deals which suggests that the sterling market has grown up,’ he added.

He points out that over the past year, the sterling market has demonstrated to large international borrowers that it is no longer a ‘niche market’ for a select group of domestic borrowers. For example, in June of this year US telecom group AT&T issued £1 billion of sterling bonds to help fund its takeover of Time Warner.

Other sterling issuers this year include the world’s biggest brewer Anheuser-Busch InBev (£2.3 billion) and Morgan Stanley bank (£1 billion).

A number of issuers which had previously only come to the market in dollars and euros decided to issue sterling bonds for the first this year. They include multi-national luxury goods company LVMH and shopping centre owner Westfield.

Bank of England boost

Vaid (pictured) notes the Bank of England’s (BoE) Corporate Bond Purchase Scheme announced last August has provided some support to the UK corporate bond market.

This was introduced after the UK’s vote in favour of leaving the European Union last June. It saw the Bank of England purchase £10 billion worth of corporate bonds, with the intention of reducing the cost of borrowing for companies. As the Bank was effectively a forced buyer in the market this caused bond prices to rise and yields to fall (as the two move inverse to each other). It was hoped that this would encourage companies to issue more bonds.

‘However, despite the programme ending prematurely in May, market strength has continued, with July having the highest monthly issuance on record.

‘The pick-up in global M&A activity as well as corporate treasurers looking to take advantage of the low interest environment by refinancing to longer dated maturities has also been an important consideration, especially in the sterling high yield market,’ Vaid added.

In the high yield market, where issuers have lower credit ratings than investment grade and the bonds provide investors with higher interest to compensate for risk, issuance was up by nearly 500%, Vaid added.

‘This is very impressive considering the challenging backdrop that many of these high yield companies, mostly domestically-focused, will face in the period leading up to Brexit and the uncertainty beyond,’ the fund manager added.

Increased supply in both markets improves ‘liquidity’ or rather the ease of trading in the secondary market. Nevertheless Vaid urges investors to continue to monitor this.

‘All in all, the sterling renaissance has provided more opportunities and a greater diversity of names to invest in. On a global basis sterling credit is still attractive, especially after hedging costs, and plays an important role in our portfolios.

'However, as is often the case at this point in the cycle, there is a need to be disciplined and more discerning with regards to opportunistic borrowers given current valuations,’ he concluded.

Jaid co-manages the £4.1 billion Fidelity Moneybuilder Income fund alongside Ian Spreadbury. It yields around 3.3% and has returned 19.8% over the past three years. This compares to 20.2% by the average fund in the sterling corporate bond sector.

1 comment so far. Why not have your say?

Law Man

Sep 01, 2017 at 17:27

This is good, but I am very disappointed that the ORB has not attracted more new issues to which we private investors can subscribe.

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