What is normal? It is a question nobody knows the answer to, exactly. The last time there seemed to be a clear answer to it was in 2007, before the credit crunch bit, but it seems increasingly clear that the answer that would have been given then no longer holds. In the second half of that year, the market was abnormally frozen, while 2008, defined by the collapse of Lehman and the near collapse of the financial system, was anything but normal.
In 2009, things looked to be getting back to normal in debt capital markets, a sense that was exaggerated by the turmoil all around it. Companies that needed financing did not have too many options in 2009, but one they did have was DCM, meaning the asset class boomed out of necessity, despite increased cost and availability that depended on geography and credit quality. But it could still not claim to be a normal year. Most asset classes had not yet found their feet and the hyperactivity of the debt markets was not sustainable.
Does 2010 offer the first glimpse of what normality now looks like? The year has been characterised by fears of a sovereign debt crisis potentially eclipsing all the problems leading to it, so probably not.
But at least most corners of the financial markets are again functioning, and issuers once more have a variety of options for raising capital. The measures taken by central banks to prop up beleaguered sovereigns have been written about extensively, not least in our Sovereign Bonds Report, but seem to be working. The European Central Bank’s efforts to keep the covered bond markets open also appear fully vindicated, with the market back in good health.
On both sides of the Atlantic, the corporate debt markets remain robust, with the US in particular looking very strong. In Europe, the re-emergence of corporate hybrids also provides real evidence of some level of normalisation. Traditionally a bull market instrument, nobody is suggesting their appearance heralds a return to the dizzy exuberance of yesteryear, but in such a low interest rate environment, it is encouraging that investors feel confident enough to venture out of their comfort zones in search of returns.
The same trend partially explains the resurgence of the high-yield market, especially further down the credit spectrum, with even junk-rated companies finding willing investors. But other factors are also at play, with high-yield also benefiting from the vacuum left by a shrinking loan market and a plentiful supply of refinancings.
Geographically, too, the market is opening up. Latin America rode the wave of DCM activity in 2009, but can claim some satisfaction from keeping the momentum going after that record-breaking year, with issuance above 2009 levels by September. With even Argentina now looking set to enter the fray, it seems debt investors are feeling very confident.
A similar story comes from the CIS. The region’s sovereigns missed out on the 2009 rush, but have made up for it this year with very healthy supply – and from a good range of names.
Overall, it makes for a very interesting picture. At the very least fixed income markets are open for business; while in some areas the market looks positively effervescent, breaking all issuance records. It suggests the market is still feeling the effects of the post-crisis euphoria, and the test will be how long it can maintain activity and whether a sovereign event can be avoided. It may be some time yet before the market can establish the new normal.
