LONDON, April 28 (IFR) - Local and international companies
were out in force in the sterling market, helping the sector
continue its impressive run this quarter despite the Bank of
England pulling the plug on its bond buying programme.
The sector has been on a tear since last summer, when in
response to the vote to leave the European Union, the BoE said
it would use its firepower to buy corporate paper from September
Ahead of the central bank announcing the completion of its
£10bn corporate bond purchase scheme (CBPS) - 11 months earlier
than originally scheduled - there was some trepidation that the
vibrancy of the market would be undermined.
But this week US consumer company Procter & Gamble raised
£750m in its first sterling outing for 15 years, and UK utility
Thames Water paid only a minimal premium for its second
dual-tranche trade of 2017, a £550m subordinated note carved
into six and 10-year maturities. The deal attracted £1.4bn of
Meanwhile the significant pipeline primed for next week's
business indicates that activity remains healthy.
"The sterling market was fully functioning before the Bank
of England introduced CBPS," said Marco Baldini, head of
European bond syndicate at Barclays.
"And it has remained well bid since the BoE's CBPS
completion announcement which itself was expected, and since the
bank is not active in the sterling primary market, I would argue
that the transmission mechanism between the sterling secondary
market is in any case less direct."
Nonetheless the BoE's withdrawal and upcoming Brexit
negotiations have prompted some to begin questioning sterling as
a strategic market for international borrowers.
"It's a home-grown market and one that has provided issuers
and investors with duration of up to 40 or 50-years, but we
expect more credit spread widening, and therefore more
international companies will lose the rationale for issuing,"
said one senior official at a US bank.
As the market anticipated an early end to the BoE programme,
initially slated for March 2018, spreads widened 4bp earlier in
April. However, they have since recovered, with the iBoxx GBP
non-financials index at Gilts plus 135bp at Thursday's close,
6bp tighter than when the BoE announced its programme in August.
And the more prominent sterling houses argue that the UK
market still has a lot to offer.
"Clearly, there is some uncertainty around the Brexit
negotiations, but we fully expect the sterling market to
continue to offer attractive financing options to international
borrowers as well as domestic," said Jonathan Peberdy, head of
syndicate at NatWest Markets.
"The sterling market has always proved resilient in times of
adversity, it has a large and sophisticated community of
investors and the UK will remain a large and important economy."
Sterling has typically been the go-to European market for
borrowers and investors alike in need of duration.
Over the past three years 37% of sterling corporate supply
has been at 15-years or longer; the equivalent figure in euros
is 5%, according to NatWest Markets.
"It remains the local base for a range of UK corporates to
raise money and enables issuers to raise very long term debt, as
well as price more complex/esoteric structures," said Jonathan
Platt, head of fixed income at Royal London Asset Management.
The central bank has so far bought £9.978bn of bonds as part
of the scheme (settled as of April 26), and is expected to
announce the final weekly purchase volumes next week.
That is equivalent to around half of the £20bn of sterling
corporate investment-grade issuance seen since the programme was
However, the removal of the BoE's backstop bid is not
expected to deter issuance in the near term, with spreads
forecast to hold steady following a string of successful deals
The pipeline includes global engineering group GKN Holdings,
which will hold investor meetings next week for a 12 to 15-year
In the high yield crossover space, insurer Saga plc, Ba1/BB+
(Moody's/S&P), will meet investors in London and Edinburgh from
May 2 for a debut, likely seven-year, benchmark.
The market can also expect to see some M&A supply from BAT
as its acquisition of Reynolds draws closer.
BAT intends to refinance two bridge facilities and said it
would sell a mix of debt in US dollars, sterling and other
currencies, although investors expect most to be in dollars.
(Reporting By Laura Benitez, editing by Alex Chambers and