Debt Capital Markets 2014 Review and 2015 Forecast

Find more about the International Debt Capital Markets trends in 2014 and predictions for 2015 across Bonds, Loans, Hybrids, Securitization and Liability Management markets.

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Executive Summary

“People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year.”
(Peter F. Drucker)

The appetite for risk has been a common driver across debt markets in 2014, as illustrated by the strong performance of credit spreads across currencies and asset classes. Many would argue that there was little alternative for investors, considering the continuous decrease in government bond yields. In the Eurozone in particular, the combination of record-low yields and abundant liquidity has boosted euro corporate and financial bond volumes well above expectations. Corporate euro volumes have reached record levels, surpassing the all-time high of 2009, but with a greater proportion of high yield and hybrids. The same has been witnessed in the Sovereign space, with non-AAA rated issuers accounting for only 40% of total euro volumes, versus 60% in 2013.

Investors have expressed increased flexibility and appetite for diversification, as illustrated, for instance, by the development of long-dated floating rate notes  in the Corporate universe, or the reopening of the inflation-linked market by Sovereign issuers. Across asset classes, the use of private placements has increased, with issuers and investors increasingly looking for opportunistic tailor-made transactions.

This appetite for risk has also been supported by a decrease in volatility, as both issuers and investors gained further confidence in the resilience of the financial markets. The "stress tests" conducted by the European Central Bank on European Union banks have been an important milestone in building up this confidence. The results released on 26 October evidenced that only 14 banks out of 123 were still experiencing a shortfall in capital.

But the most striking illustration of this turnaround in confidence is the burst of M&A related transactions. Between 2009 and 2012, most issuers had been focusing on deleveraging and building up important cash positions as a cushion against a potential new liquidity crisis. Thanks to the massive quantitative easing conducted by the central banks, they have now accepted that liquidity is not likely to be a concern in the immediate future, and have decided to take advantage of the current recordlow cost of debt to fund external growth. Acquisition financing transactions have increased considerably in the second half of 2014, both in bond and loan formats, and we expect this to continue in 2015.

Another important theme across asset classes is the development of the "green bond" market, which has more than doubled in size in 2014. The profile of issuers has expanded considerably over the last 12 months, from a few supranational and development banks to local authorities and an increasingly diverse universe of private banks and corporates. n

Overall, 2014 has exceeded expectations, whether it is in term of volumes or yield performance, and the consensus is clearly in favour of this positive dynamic continuing to develop in 2015. But as credit spreads continue to tighten, the challenge for both issuers and investors will be to remain selective. The collapse of Phones4U in August 2014 has reminded high-yield investors that credit risk is still meaningful, and is very much name specific. The market nervousness experienced in October has reminded issuers that volatility is never far away in a global macro environment which remains difficult. These two healthy reminders should help pave the way for another very successful year in the debt capital markets in 2015.