Market News

BY  Lyubov Pronina and Alice Gledhill, Bloomberg News

(Bloomberg) --

Sterling-debt sales by corporates exceeded 2020’s annual tally as borrowers rushed to secure ultra-cheap funding costs while they still can.

Offerings will top 70 billion pounds ($95 billion) through Wednesday, beating last year’s total sales by at least 600 million pounds, according to data compiled by Bloomberg. A recent surge that included deals from Banco Santander SA to Volkswagen AG also pushed September pound issuance to the highest since at least 2014.

It’s a sign that issuers are all too aware that borrowing costs won’t stay low forever, especially as U.K. government bonds, a key component in companies’ funding costs, sell off on the prospect the Bank of England may tighten policy sooner rather than later.

“The BoE’s more hawkish stance may lead issuers to believe that underlying yields will go up further, and therefore pre-empt that by issuing in the near term,” said James Solomon, a director on the syndicate desk at RBC Capital Markets.

Read More: U.K. Yields Soar, Pound Plummets as Inflation Concerns Mount

The yield on 10-year gilts, a benchmark debt, was headed for its biggest monthly gain since February. And the average rate on sterling investment-grade corporate bonds climbed to 1.87%, according to a Bloomberg index, just short of its highest point this year. Euro investment-grade notes yield an average of just 0.32%.

Deep Demand

Strong investor demand has been another factor supporting sterling issuance this year, not always a given in the currency. 

Subordinated financial bonds have drawn particularly big order books in recent weeks: a Just Group Plc 325 million-pound Restricted Tier 1 5% perpetual note was about nine-times covered; a 400 million-pound Berkeley Group Plc green bond was more than five-times subscribed in early August. 

Once you throw in ample cash to reinvest from tenders and redemptions, it’s a “perfect storm for large issuance,” said Bryn Jones, manager of the 1.8 billion pound Rathbone Ethical Bond Fund.

At the same time, the proportion of non-domestic borrowers has also increased, to 57% this year from 39% in 2020. One example is U.S. pharmaceutical company Eli Lilly & Co., which sold debut pound notes this month. 

“We have been calling out to international borrowers how attractive the sterling market is for months now,” said James Cunniffe, director for corporate syndicate at HSBC Holdings Plc in London.

Selective

Some sterling portfolio managers are expressing caution as the BOE mulls the right moment to hike rates and inflationary pressures remain high. Gordon Shannon, a portfolio manager at TwentyFour Asset Management, said he’s passing on the majority of new issues because he’s trying to mitigate duration risk in his funds. 

“Generally, I want to run a portfolio with shorter-dated higher spreads, so my break-evens are higher and I have protection against a generic rise in yields,” he said. “That means mostly avoiding primary.”

Still, investors have cash they need to spend and so corporate treasurers are taking advantage of that. Ocado Group Plc and Southern Housing Group Ltd are among the companies lining up new issues. 

“If you have to issue, it makes sense to do it now, rather than wait,” Shannon said. “You’re looking at a very small amount of carry and are potentially issuing now at a much better level than in a few years’ time.”