TheChek News Flow

US rating agency employees in Beijing and Shanghai believe concern over possible backlash prompted unusual move

Moody’s Investors Service advised staff in China to work from home ahead of its cut to the outlook for the country’s sovereign credit rating, a suggestion staff believed was prompted by concern over Beijing’s possible reaction, according to two employees familiar with the situation.

The move by the US rating agency highlights the unease of many foreign companies doing business in the world’s second-largest economy, where some have suffered police raids, exit bans for staff and arrests amid tensions between China and the US and its allies.

Some Moody’s department heads in the country told associates on Friday that non-administrative staff in Beijing and Shanghai should not go into the office this week, they said.

“They didn’t give us the reason . . . but everyone knows why,” said one China-based Moody’s employee, referring to the request to work from home. “We are afraid of government inspections.”

The staff member said Moody’s also advised analysts in Hong Kong to temporarily avoid travel to the Chinese mainland ahead of the cut. The agency on Tuesday lowered the outlook for China’s A1 long-term local and foreign-currency issuer rating to negative from stable.

The staff member said working from home might prevent Chinese authorities from questioning many employees in one place if they decided to raid the agency but added that such a raid was still considered to be unlikely.

A Moody’s spokesperson said: “Our commitment to maintaining the confidentiality and integrity of the ratings process is paramount and therefore, we cannot comment on internal discussions, if any, related to specific credit ratings or issuers.”

Chinese authorities have raided the offices of several US-based consultancies this year and detained local employees of due diligence group Mintz over what Beijing said were national security concerns.

“We’ve seen crackdowns on due diligence companies and other firms, but those have been motivated by issues beyond just negative commentary,” said Michael Hirson, a China analyst at 22V Research in New York.

“I would be surprised if Moody’s rating action, which is based on just an argument about the outlook, generates anything remotely like an overt crackdown on the company,” Hirson said. “But clearly how the authorities handle this will be a test that investors and the business community are watching.”

Moody’s latest rating action has already triggered a spate of criticism from Chinese officials and on social media. In a statement on Wednesday, the National Development and Reform Commission, an economic planning body, accused the rating agency of “bias and misunderstanding of China’s economic outlook”.

A popular WeChat social media account operated by state broadcaster China Central Television on Wednesday dismissed Moody’s concerns about a slower growth outlook and soaring government debt, two drivers of the cut in outlook. The post said Chinese authorities had “always been working on annual projects, looking at five-year plans while thinking about the long term”.

“A misjudgement by [Moody’s] will not cause too much harm for the Chinese economy,” said the post. “It may cause the company to lose its credibility.”

Another Moody’s staff member said some of the points raised by Chinese authorities made sense and that the agency was concerned about regulatory risks following the rating action.

“We can’t guarantee every single fact in our ratings report is correct,” the person said. “The Chinese authorities can make trouble for you if they want to.”

Despite the concerns, the rating agency on Wednesday lowered its outlook for Hong Kong, Macau and 18 Chinese state-owned and private companies, including tech groups Tencent and Alibaba, from stable to negative.

Moody’s in a statement said the rating action was “primarily” driven by the change in outlook for China’s government credit ratings and reflected increased risks “related to structurally and persistently lower medium-term economic growth”.

Beijing and Riyadh are expanding their economic relationship as they seek to reduce reliance on the US and its allies

China’s vice-premier He Lifeng told Hong Kong’s elite last month that he had “some suggestions” for the territory — a list that included building closer ties with the Middle East.

Hong Kong should “further expand its circle of friends” by developing relationships in the region, he said. This week, it is taking an important step in its effort to do so. Saudi Arabia’s Future Investment Initiative Institute, which hosts the Gulf state’s so-called Davos in the Desert conference in Riyadh, opened its first Asia gathering in Hong Kong on Thursday.

John Lee, the city’s chief executive, said in a speech he was “very delighted” that Hong Kong was hosting the event, adding it was “yet another significant step forward in deepening ties between Hong Kong and the Middle East, particularly the Kingdom of Saudi Arabia”. Yasir al-Rumayyan, governor of Saudi Arabia’s $700bn Public Investment Fund, is in Hong Kong for the conference.

The event, which comes a year after Chinese President Xi Jinping visited Saudi Arabia on a trip Beijing hailed as an “epoch-making milestone”, is the latest sign of growing economic ties between the two countries as they seek to reduce their reliance on the west.

China, the biggest market for Saudi crude oil, is one of about half a dozen “strategic relationships” for the kingdom, said one longtime Saudi Arabia watcher and emerging market investor who declined to be identified by name.

High on Riyadh’s wish list from that relationship is investment from China — even as China’s economy slows. Riyadh has committed to costly domestic infrastructure projects, including hosting the 2030 World Expo and the men’s football World Cup in 2034. Goldman Sachs estimates the Gulf state could spend about $1tn by the end of the decade on sectors ranging from clean technology to mining and on its plan to build a futuristic city called Neom.

“Where is the money going to come from?” the emerging market investor said. “Enter China.”

Direct ties between Riyadh and Beijing were strengthened when Saudi Arabia sent one of the biggest official delegations to China’s “Summer Davos” gathering in June. But Hong Kong still acts as a gateway for finance and investment.

Hong Kong Exchanges and Clearing (HKEX) this year signed a co-operation agreement with Saudi Arabia’s stock exchange operator Tadawul and launched an exchange-traded fund that tracks equities in the Gulf state. A Hong Kong government task force on boosting the territory’s stock market has called, among other things, for a push to attract initial public offerings of companies based in the Middle East.

FII Institute head Richard Attias said Laura Cha and Nicolas Aguzin, HKEX’s chair and chief executive, were “extremely active” in Saudi Arabia and “close friends” of the organisation.

The pair had visited the Gulf state four or five times in the past year, Attias told the Financial Times.

“I think the rationale is quite easy,” he said. “When you lead a stock exchange you want investors to invest in the companies which are listed . . . the money is not only in America or Europe; it is more and more in this part of the world.” 

HKEX declined to comment.

“The Middle East is rising in terms of geopolitical importance as well as in terms of economic development,” Cha said at the conference on Thursday. China’s relationship with Saudi Arabia “is going to be an amazing connection that has been under developed in the past”, she added.

For Hong Kong, an important prize would be convincing the kingdom’s oil company Saudi Aramco to carry out a secondary listing in the territory — a move that could boost the city’s status as a global financial centre.

But such a listing could be difficult to achieve. The Riyadh market values Saudi Aramco significantly more highly than international markets are likely to, the emerging markets investor said.

Thursday’s Hong Kong conference is part of broader changes in the territory as US investors reduce their exposure to China.

Several western investment bankers in Hong Kong, who spent much of the past decade helping Chinese companies raise cash either privately or in initial public offerings in the US, told the FT they now pitched their roles differently. Mainland clients want them to help set up meetings in the Middle East instead, they said.

Investors in Saudi Arabia increasingly want to talk about technology transfer, one of the bankers added. Chinese electric vehicle companies plan to build manufacturing plants in Saudi Arabia, which wants to become a global player in the sector.

Saudi Arabia has also attracted Chinese expertise in artificial intelligence, although deeper collaboration threatens to limit the kingdom’s access to US chips needed to power competitive supercomputers, given Washington’s concerns about China.

Attias said the transfer of knowledge was crucial for Saudi Arabia. “Today you have two superpowers working on AI, you have the Americans and you have the Chinese,” he said. “You cannot just look [to] the west, you need to look east.”

The growing economic ties come as Saudi Arabia, traditionally one of the closest US partners in the Middle East, looks to Beijing and Moscow to counter Washington’s security dominance in the region.

China was pivotal in an agreement by Saudi Arabia and Iran to re-establish diplomatic relations in March. Ties with China also give the kingdom leverage in conversations with the US and Europe, the emerging markets investor said.

The event is an example of global “shifting power structures”, said Sir Martin Sorrell, who runs the digital marketing company S4 Capital and travelled to Hong Kong for the FII conference.

“It’s a much more difficult world to navigate now,” said Sorrell, whose group has issued multiple profit warnings this year. However, he added: “Saudi and China are major opportunities for us to expand.”

Commercial property confronts the ‘comedown’ from easy money

As René Benko’s Signa property empire implodes, the rest of the sector faces a reckoning

Behind the glittery facades of London’s Selfridges and New York’s Chrysler Building, Austrian property billionaire René Benko assembled a financial time bomb.

Benko’s Signa Group, which bought stakes in the two trophy assets and amassed a €27bn ($29bn) property portfolio, racked up at least €13bn in debt during the years when the cost of borrowing was next to nothing.

“He gorged himself on cheap financing left, right and centre,” said one European property executive.

The decision to go all-out during the era of cheap money left Signa dangerously exposed to the sharp rise in interest rates this year. JPMorgan estimates at least €4bn of the debt owed by two pivotal Signa subsidiaries is at floating rates. And rising interest rates have hammered commercial property values across the market, reducing the value of the assets used to secure Signa’s loans.

Signa Holding, the central company, filed for administration last week. 

The group faces tough questions about its business practices and valuations but its unravelling is the most prominent symptom yet of a painful adjustment to higher interest rates across the multitrillion-dollar global commercial real estate sector. 

Property owners prospered in the world of cheap debt that made real estate investment relatively attractive. But that high has led to a predictable reckoning.

“The scale of the cyclical reset in terms of real estate valuations is as big as the early 1990s or the global financial crisis,” said Alex Knapp, chief investment officer for Europe at $100bn global private real estate investor Hines. “This is a big one, if that wasn’t obvious.”

Unrealised losses

With the era of ultra-low interest rates over, property owners — from small private businesses to large public companies — face higher interest bills, falling valuations and in many cases a need for cash to pay down debts. 

European property groups have emerged as a focus of trouble. Swedish landlord SBB cut a deal with Brookfield to raise funds and is facing angry bondholders demanding their money back. Germany’s Adler survived a UK court challenge by bondholders this year over its restructuring plan, as it tried to avoid insolvency.

Many property owners are sitting on unrealised losses. Tom Leahy, executive director at MSCI Research, estimated in September that about 50 per cent of London’s commercial real estate assets are now worth less than what they were acquired for. New York fared relatively better, with just a fifth under water, but many office owners there face steep losses.

Owners will do what they can to avoid crystallising those losses. Official valuations tend to lag behind market reality because they rely on evidence of other transactions, and dealmaking has stalled. The value of completed deals is down more than 50 per cent in Europe and the US in the third quarter against a year earlier, according to MSCI.

“Sellers aren’t selling something unless they have to. Buyers aren’t buying something unless it’s really cheap. To take something to investment committee, it needs to feel like a distressed deal,” the European executive said.

Property analysts at Green Street compiled a list of more than €3.3bn worth of UK and European office buildings that had failed to sell in 2023 after being put on the market, including Frankfurt’s Commerzbank Tower, saying the list was probably just “the tip of the aborted sale iceberg”.

What forces reality on the market is when loans come due, or covenants on loans are breached. Owners will try to discreetly cut deals with their lenders or privately sell some assets to raise cash. That process can be slow. 

“People talk about a wall of refinancing but it never actually works that way. It will take a period of years for those discussions to work out,” Knapp said.

Refinancing struggles

The financial pain will not fall evenly across the wider property market. For some landlords seeking cash, the proliferation of alternative lenders since 2009 means there are debt funds ready to take up the slack left by the banks.

“In the past 12 months, suddenly, it’s like everybody realised that I don’t have to buy that asset for 100 per cent of the price, I can lend against that asset for 60 per cent. If it all goes wrong, I have priority security,” said Lisa Attenborough, head of debt advisory at Knight Frank. “I now have probably over a hundred credit funds on my books.”

New investors have piled into credit partly because straightforward purchases look tricky, since property values could drop further. Many investors think debt is a safer bet.

“Pricing an asset in a higher-for-longer world is tough. So finding buyers willing to take equity risk is equally tough,” said Max von Hurter, head of European M&A at real estate investment bank Eastdil Secured. “Credit deals are easier — investors can earn a very respectable return without taking the first dollar of exposure.”

But financing is not available for everyone.

Signa faced €1.3bn of loan maturities in 2023 that it struggled to meet despite frantic talks with lenders and prospective new investors.

Assets with decent rental prospects — such as warehouses, residential buildings and the top slice of offices — will find refinancing easier.

The difference is between assets that need to see their value correct, and those whose value is expected to be wiped out.

“We are actually seeing assets becoming stranded with a velocity that we have never seen in the market before,” said Raimondo Amabile, co-chief executive of PGIM’s $210bn real estate business. “No one wants to lend against a stranded asset.”

Amabile said the calculation for owners of potentially stranded offices was “completely different”. “I am not going to throw a penny into this. It is basically a bank [problem],” he said.

Some assets will struggle because they have been loaded down with too much cheap debt that needs to be refinanced, even if they have decent tenant demand and rents.

Even the largest investors have cut their losses on some office buildings, including Brookfield’s decision this year to default on two Los Angeles towers. Office towers in New York have changed hands for less than the value of the land they sit on, as investors look for alternative uses for obsolete buildings.

The storm facing office owners, particularly in North America, combines a sharp drop in demand and the need for significant spending to upgrade outdated buildings, on top of the wider real estate downturn and rise in debt costs. Knapp said it amounted to a “little global financial crisis for secondary offices”.

The storm is also intensifying in Germany. Signa’s troubles will deal another blow to the country’s market, further curtailing banks’ appetite to lend to commercial real estate.

“There is going to be a little bit of a fire sale, but not to the extent that it is going to bring down banks,” said Peter Papadakos, head of European research at Green Street. “Signa is not systemic to the wider real estate market. Where the real shitshow is going to be is specifically in Germany, and in offices.”

Still, lower inflation figures for October and increasing market bets that rates will be cut earlier than previously thought have fortified private hopes among some in the real estate sector that they can ride out the downturn. European real estate stocks have risen almost a quarter since the end of October as investors adjust their expectations.

Real estate veterans point out that the industry functioned for decades with higher rates. The challenge for an asset class that relies heavily on debt is navigating the shift after more than a decade of ultra-cheap borrowing.

“It takes a while for people to come down from the excitement of a low interest rate environment,” said Philip Moore, head of European real estate debt at Ares. “You are seeing the slow dawning of the fact that what we had over the past 10 years with a low interest rate environment was more of a blip than the norm.”

Franco-Israeli billionaire under pressure to sell assets to pay down Altice debt

Bankers have sounded out potential buyers for a minority stake in Sotheby’s as its owner Patrick Drahi comes under pressure to sell assets at his indebted telecoms group Altice.

Those approached included European billionaires and the Qatar Investment Authority, said two people with knowledge of the contacts. The QIA held unfruitful talks with Drahi a year ago about buying a Sotheby’s stake via a potential capital increase, another person directly in the know said.

However, people close to Drahi said the Franco-Israeli billionaire was reluctant to offload Sotheby’s, which he has owned since 2019 through his personal holding company. The bankers’ approaches were informal and a deal was not imminent, they cautioned.

“Sotheby’s is a unique asset that has regularly attracted interest from investors interested in taking a minority stake,” said one of the people.

The Hamas attacks on Israel may also have complicated a potential sale to Qatar, a person close to Drahi said. Drahi is a prominent figure in Israel, where he owns a television news channel and a telecoms operator, and Qatar has hosted Hamas’s political office since 2012 while pouring hundreds of millions of dollars of aid into Gaza.

The Sotheby’s pitch came after Drahi announced in August that Altice was looking to sell assets to cut its $60bn debt mountain racked up during years of frenetic acquisitions in France, the US, Portugal and Israel.

Bondholders have grown worried after Drahi’s right-hand man Armando Pereira was arrested in Portugal in July over allegations of corrupt procurement practices at Altice. Drahi has said he was “shocked” by the investigation into Pereira and Altice has pledged to clean up its internal practices.

The telco entrepreneur has asked banks including Lazard and Morgan Stanley to explore asset sales. These include Meo, the Portuguese operator at the centre of the Pereira corruption case, a stake in French mobile operator SFR and online advertising business Teads, according to people briefed on the process. Initial bids are expected in the coming weeks.

In November, Altice struck a deal to sell a majority stake in its data centre business in France, valued at €764mn, to a Morgan Stanley infrastructure fund. 

Drahi bought London-based Sotheby’s in 2019 for $3.7bn via his family office, not Altice. In 2022, its revenue rose 8 per cent to $1.4bn compared with a year earlier, although the company posted a net loss of about $515,000, according to accounts published in Luxembourg.  

Sotheby’s accounts also showed that it paid out more than $26mn to Drahi’s main Luxembourg investment vehicle in 2021 and 2022 for “strategic advisory and other executive-level services”.

Qatar has been interested in auction houses in the past. In 2010, the then emir Hamad bin Khalifa al-Thani, told the Financial Times that he would be interested in bidding for Sotheby’s rival, Christie’s, which is owned by the Pinault family. 

Various members of Qatar’s ruling family have become some of the world’s most active art collectors — and sought-after clients for auction houses. Gas-rich Qatar boasts a collection shown across a broad range of museums, from modern art to Islamic antiquities, overseen by the emir’s sister, Sheikha Al Mayassa bint Hamad al-Thani.

Seeking to diversify away from hydrocarbons, Doha is hunting for assets to complement its existing portfolio, which includes Harrods department store and the Shard tower in London.

QIA and a spokesman for Drahi declined to comment.

Venezuela raises stakes in dispute with Guyana over oil riches

President Maduro claims mandate to incorporate Essequibo region but imminent war may be a ‘bluff’

Venezuela’s President Nicolás Maduro has dramatically raised the stakes in his country’s border dispute with Guyana, ordering state companies to exploit contested oil and mineral deposits and redrawing official maps after claiming an “overwhelming” mandate in a referendum last Sunday.

Maduro’s bellicose speeches have alarmed Guyana and sparked fears that Venezuela might use force to seize the remote Essequibo area, which accounts for two-thirds of its neighbour’s territory, as well as a big offshore oilfield operated by US oil major ExxonMobil.

Guyana’s President Irfaan Ali late on Tuesday said his country’s defence force was “on high alert” and promised to refer the matter to the UN Security Council. “Venezuela has clearly declared itself an outlaw nation,” he added.

A conflict between two oil-rich nations in the Americas would be a nightmare for the Joe Biden administration, which has eased economic sanctions on Venezuela in the hopes that Maduro could be persuaded to hold free and fair elections next year and help improve global oil supplies.

But most experts believe military conflict is unlikely in the near term. They say the revolutionary socialist Maduro’s main motive for running a patriotic referendum campaign was to take voters’ minds off his own unpopularity and the evident support for the main opposition candidate in next year’s presidential election, María Corina Machado.

“My sense is that it’s probably a bluff,” said Evan Ellis, professor of Latin American studies at the US Army War College. “It’s probably an initiative by Maduro to distract attention from the presidential election and US pressure for democratic reform.”

Officials in Caracas claimed majorities of more than 95 per cent in favour of five referendum questions on Essequibo, including the creation of a new Venezuelan state encompassing the remote territory.

But independent observers questioned the official turnout figure of 10.5mn — which if true would exceed the number who voted for Maduro’s popular predecessor Hugo Chávez in the presidential election of 2012 — noting that many polling stations were sparsely attended.

Venezuela has long disputed an international arbitration tribunal’s decision in 1899 to award Essequibo, an area the size of Greece, to what was then colonial British Guiana. It was Exxon’s discovery in 2015 and subsequent exploitation of one of the world’s biggest recent oil finds off the Essequibo coast that reignited Caracas’s interest.

Exxon is now building up production from the Stabroek offshore block, something Venezuela’s government has used to portray Guyana as a US puppet.

The US state department gave a muted response to Sunday’s vote, urging Venezuela and Guyana “to continue to seek a peaceful resolution of their dispute”. “This is not something that will be settled by a referendum,” it added.

Brazil, which borders Venezuela and Guyana, has sent additional troops to the border area and President Luiz Inácio Lula da Silva said he hoped “common sense would prevail on both sides” of the dispute.

Venezuela announced this year the construction of a military airstrip, a school and a training ground near the border with Essequibo. A top government official posted a video on social media after the vote showing a group of indigenous people lowering a Guyanese flag and raising a Venezuelan one in its place, purportedly in Essequibo.

Some Guyanese people fear their nation of 800,000 people would be unable to resist an invasion by its far larger neighbour. “People are [very] scared, they are very worried,” said Mike Singh, a telecoms investor who runs a Georgetown-based consultancy.

“Guyana has nothing to defend itself with except bluster like what we hear from vice-president [Bharrat] Jagdeo and people know it is just balderdash. He’s in no position to do anything.”

Nonetheless, Nicholas Watson, Latin America managing director at consultancy Teneo, believes the Venezuelan regime’s hawkish turn on Essequibo “reflects domestic considerations more than it signals the imminence or likelihood of military action”.

“We don’t know what it really means or what they’ll actually do,” he said. “Maduro is an expert at sleight of hand, at big gestures which mean nothing.”

Any military conflict would heavily favour Venezuela, whose Russian-equipped armed forces far outnumber and outgun Guyana’s tiny defence force. “Venezuela has Sukhoi fighters, MiG attack helicopters, decent naval assets including equipment from Iran, and Russian tanks,” Ellis said.

But Maduro’s armed forces were in a poor condition to occupy the difficult jungle terrain of the Essequibo, Ellis added. Sending Venezuela’s armed forces to fight would be fraught with risk for Maduro, who has relied heavily upon military support to keep power, rewarding senior officers with what US officials say have been highly lucrative franchises in drug smuggling and illicit gold mining.

Phil Gunson, Andes senior analyst at International Crisis Group in Caracas, said: “Maduro is only in power thanks to the military high command and if they think he’s losing it, then it could be very serious for him.”

Gunson added: “Maduro is claiming a massive mandate to recover the Essequibo and there’s no clear path to doing that.”

As tensions rise, some see parallels with the early 1980s, when an unpopular Argentine military government launched an invasion to resolve a longstanding territorial claim. The unsuccessful war over the Falkland Islands, or Malvinas as Latin America calls them, ended up being the junta’s undoing. Gunson believes Venezuela is unlikely to go to war now over Essequibo.

“The more likely scenario is that at some point Maduro finds it expedient to whip up the tension on the border and perhaps provoke some skirmishes with the Guyanese military,” he said. “I don’t think that will lead to a full-scale war but the problem is that once you start actually having armed conflict . . . it’s very easy for that to escalate.”

Companies rush to take advantage of sharp drop in borrowing costs

Bond issuance by US and European firms surges as market becomes more confident of interest rate cuts next year

Companies on both sides of the Atlantic are rushing to issue debt, taking advantage of the cheapest borrowing costs available in months following the sharp global bond market rally.

Corporate borrowers in the US and Europe issued $246bn worth of investment-grade and junk bonds in November alone — 57 per cent more than October’s total, and $16bn higher than the average figure for the first 10 months of the year, according to data from LSEG.

The flurry of issuance has continued this week, with highly rated borrowers including General Motors Financial, phosphate producer Mosaic and telecoms tower owner Crown Castle announcing fresh deals.

Further down the credit quality ladder, low-grade borrowers including Kinetic Holdings, automobile financing firm Credit Acceptance and residential mortgage company PennyMac Financial Services are among those joining the ranks of issuers in recent days.

“You don’t see that level of activity the week after Thanksgiving or into December” in a normal year, said Teddy Hodgson, co-head of Morgan Stanley’s investment-grade syndicate.

The acceleration in issuance follows a rapid shift in investor sentiment over the past few weeks, in which markets have begun to price in US and European interest rate cuts in the first half of next year. As recently as October, fears over “higher for longer” interest rates had pushed many companies to press pause on borrowing plans.

“There is definitely a wave of supply trying to get in before year-end,” said Maureen O’Connor, global head of Wells Fargo’s high-grade debt syndicate.

“All the stuff that is trickier throughout a more choppy market environment is finding a welcome reception,” she added. “[Conditions] are so vastly improved from where we were in October that you are seeing some of the more truly opportunistic stuff coming to the market.”

US bonds recorded their best monthly performance in nearly four decades in November, as softer-than-forecast inflation and jobs reports fuelled expectations that the Federal Reserve and the European Central Bank will begin cutting rates as soon as spring 2024.

Treasury yields, which move inversely to prices, have dropped sharply and translated into lower borrowing costs for companies across the credit spectrum.

The average yield for high-grade US bond issuers now stands at 5.52 per cent, its lowest level since July, according to data from Ice BofA. Junk bond yields, meanwhile, are now less than 8.4 per cent, also their lowest level since July.

“It does not feel like a market that’s hanging its boots up for the year. This is one of the most positive backdrops of the year,” said Mark Lynagh, head of global investment-grade finance at BNP Paribas. “[For companies] it’s a great time to go.”

As yields have fallen, the premium over Treasuries paid by corporate borrowers to issue debt has also dropped rapidly, as investors’ appetite for risk has increased. The so-called “spread” on investment grade bonds has fallen to 1.12 percentage points, around its tightest level since February 2022.

Part of the pick-up in issuance reflects “pent-up volume” from deals that had been expected in October and early November, said Richard Zogheb, global head of debt capital markets at Citi. However, there is also “absolutely a component of folks who are seeing [companies] coming to market and what they’re able to achieve, and saying ‘wow, this looks kind of attractive’”.

Pointing to the conflicts in the Middle East and Ukraine, he noted that “there’s still a lot of uncertainty in the world”.

“[Borrowers are saying], ‘if I can move quickly, maybe I should think about accessing this market’,” he added.

So far, overall volumes for the fourth quarter are not expected to be significantly higher than average because of October’s weak volumes, say bankers.

However, the decline in debt costs means that “a number of issuers [are] making a conscientious decision to get ahead of funding next year”, said Morgan Stanley’s Hodgson.

“The investment-grade market rarely holds for considerable periods of time at spreads [at these levels] other than extreme stimulus environments like we saw during Covid,” he added.

Many companies have looming refinancing needs. Investment-grade US companies, for instance, have a record $1.26tn of bonds coming due in the next five years, up 12 per cent from the previous year, according to an October report from rating agency Moody’s. Speculative, or junk-rated, maturities over the same period stood at $1.87tn across bonds and loans — also a new record.

Some said the rush to borrow could also reflect concerns that unexpected data or other developments — for example, a hotter than forecast inflation report — could trigger a reversal in bond yields.

“There is a sense that [the market] might continue to feel good, but it very well might not,” said Wells Fargo’s O’Connor. “So some companies are saying — ‘why not go now, and at least de-risk a portion of my funding needs — if not all of them?’”.

Citi’s Zogheb said the market was likely to remain solid until Christmas. “Ourselves and our competitors are out there encouraging people and saying ‘it feels really good’,” he said.

“Investors believe that inflation is under control and that we are heading for a soft landing . . . but no one knows for sure and things can change quickly.”

Italy’s veto on French deal shows EU defence consolidation is a distant dream

Rome’s decision to block Safran’s acquisition of Microtecnica is latest shot in an often strained security relationship

Three guesses on the nationality of the company that the Italian government has deemed to be “an exceptional threat” to national security owing to its interest in buying a small Turin-based aerospace supplier? 

If you guessed a Chinese or Russian company, you would be wrong. It is, in fact, Safran of France, the aerospace and defence company that supplies to critical European military programmes such as Eurofighter.

Safran has made a $1.8bn offer to buy the flight controls and actuation business of Collins Aerospace, which owns Italy’s Microtecnica. The Italian company specialises in making flight control actuators, systems that make things such as wing flaps move on an aircraft.

Rome’s decision to block Safran’s acquisition of Microtecnica — which accounts for just 15 per cent of the wider business’s revenue — was remarkable not just for the virulence of the language. It was surprising because for almost 40 years Microtecnica has been owned by a series of US companies. At the very time when Europe is calling for greater consolidation of its fragmented defence sector, Rome has deemed a company part-owned by an EU ally — the French government, which has an 11 per cent stake in Safran — to be a threat.

This is just the latest shot in an often strained Franco-Italian defence relationship. Certainly, relations have been frosty since France and Germany opted to launch a future fighter aircraft programme in 2017 without involving Italy. “Italians saw themselves as a major player on combat aircraft and they were not even consulted,” said an executive who worked with the Italian defence sector at the time. Soon after, Italy ended up joining the rival fighter programme put together by the UK, which had also been excluded.

Then there was the failed attempt by Italy’s Fincantieri to buy French shipyard Chantiers de l’Atlantique from South Korea’s STX also in 2017. Paris briefly nationalised the shipyard in order to scupper the purchase. In 2019, it referred the deal to the Competition Commission in Brussels. Two years later it collapsed before the commission’s investigation had finished. 

It is hard to avoid the feeling that there might be an element of payback in the Microtecnica decision. But Italy has been careful not to assume sole responsibility for the veto. It sought the opinion of the German government, which voiced concerns about continuity of supplies to the Eurofighter and Tornado fighter jet programmes. As Safran supplies a major competitor — Dassault’s Rafale combat aircraft — this could be a risk, it was suggested. Italy went further. Rome warned that Safran might pursue “business logics not aligned with the needs of . . . Italian defence”.

But it makes no sense for Safran to buy a business only to sabotage it. Yes, one of the three Italian production lines may be vulnerable when job guarantees expire, according to insiders. But Safran has to supply competing customers without prejudice in all parts of its business and this is no different.

There is another possible explanation for German and Italian reservations — and it has nothing to do with the Eurofighter or Tornado fighters. Instead, it may be tied up with their respective roles in Europe’s competing combat aircraft programmes.

Since the war in Ukraine, governments are keen to ensure sovereignty in critical defence capabilities. There are few systems as critical as flight control and actuation, which manage the manoeuvrability of an aircraft. If Safran succeeds in acquiring the Collins unit, much of the EU’s capability in flight controls and actuation will be in French hands, says a person with knowledge of the Italian position. “The Germans weren’t happy about that or the Italians either,” he added. 

The Franco-German combat aircraft programme was stalled for a year as the two countries fought over how to share intellectual property arising from flight control system development. Although Microtecnica’s is not the same technology, it is equally critical.

Italy may also be looking at the consequences for its involvement in the UK-Japanese-Italian Global Combat Aircraft Programme. If Safran acquires Microtecnica it could arguably weaken Italy’s chances for influence in this sphere, say insiders. 

A compromise may still be reached. That seems to be the pattern of many of these Franco-Italian spats. If not, Safran could explore buying everything but Microtecnica. Whatever the outcome though, the Microtecnica saga is proof of just how difficult it will be to achieve those European ambitions for a less fragmented defence industry.