Surging inflation, rapid interest rate hikes and a darkening economic outlook have weighed on bond sales from Europe's top-rated corporate issuers.
Yet tentative signs are emerging that supply and investor appetite are picking up, especially as signals that inflation might be peaking bring some stability to volatile markets.
German housing giant Vonovia last week raised 1.5 billion euros ($1.54 billion) amid strong investor demand in primary markets, a bright spark for a beleaguered property sector.
"If we concentrate on the past couple of weeks, now this is a good entry point," said Giulio Baratta, head of investment grade finance at Debt Capital Markets, EMEA at BNP Paribas. "Vonovia, for instance, came at a decent yield and the fact that it is a lead player (meant) the deal was successful without much question around the real estate sector."
The Vonovia sale was nearly six times oversubscribed.
Also noteworthy was a 750 million euro hybrid bond sale from Spanish telecoms firm Telefonica, the first offering of its kind in Europe in two months.
Hybrid bonds, which combine debt and equity features, in particular have suffered as such bonds are generally seen as riskier to hold than regular corporate investment grade bonds.
During the ultra-low rate environment of the past decade, companies typically used the called date on a hybrid bond to refinance debt at super low borrowing rates.
But that option has been less appealing as rates rise hard and fast to contain inflation. The European Central Bank has hiked rates by 200 basis points since July; the Federal Reserve is in the midst of the swiftest tightening of U.S. monetary policy in 40 years.
There were no hybrid bond deals in June and July, and only one transaction in September before Telefonica's offering.
New hybrid bond sales total just over 10 billion euros so far this year, compared with 30 billion euros for the whole of 2021. In the broader market, investment grade corporate issuers have raised 258 billion euros so far this year compared with 322 billion euros in 2021, according to Refinitiv data.
Graphic: European hybrid bonds issuance -
The reopening of the hybrid market signals investors' confidence is returning after latest U.S. inflation data boosted hopes that rates would peak soon, boding well for more bond sales.
"The hybrid market has been a victim. We reached peak fear in June with investors really questioning the ability for companies to refinance in the market," said Johnathan Owen, a portfolio manager at TwentyFour Asset Management, pointing to how much and how quickly spreads and interest rates have moved this year.
The spread on the iTraxx European index, measuring the cost of insuring exposure to a basket of investment-grade European firms, hit a decade high at 143 basis points in late September before retreating to around 95 bps.
"It is all a matter of gaining confidence that the market is consolidating progressively," BNP's Baratta said.
Others added that for now, hybrid bonds may offer opportunities for high yield and hedge fund investors seeking higher returns without exposure to rising default risks facing sub investment-grade corporate issuers.
"Before, when we had quantitative easing, active management was less well rewarded, but now this has changed, particularly in hybrids, because if you do the work and you can be comfortable that the issuer will call, you can earn some very attractive returns," TwentyFour Asset Management's Owen said, noting investment grade rating of most hybrid issuers.
($1 = 0.9771 euros)
(Reporting by Chiara Elisei; Graphic by Vincent Flasseur; Editing by Dhara Ranasinghe and Tomasz Janowski)
By Chiara Elisei