European blue-chip borrowing costs near pre-crisis record low
Confidence over corporate creditworthiness sees spread fall to near 50 basis points
A measure of the cost for blue-chip companies to borrow in Europe is close to an all-time low set during the 2007 boom in easy lending, according to analysis of the market by Citi.
After a strong rally in recent weeks and with European Central Bank purchases of corporate debt — which suppress borrowing costs and push up prices — set to continue until at least the end of the year, some investors are starting to ask what can prevent the record from falling.
Joseph Faith, credit strategist for Citi, said that, with few potholes on the horizon, “what seemed impossible to most (us included) only a few months ago, now has to be considered within the realms of possibility”.
Corporate credit typically trades in terms of a spread, the difference in borrowing costs between those for high-quality companies and a risk free alternative, such as government bonds or derivative contracts known as interest rate swaps.
For the euro iBoxx corporate bond index, the spread over commonly traded swap interest rate derivatives had fallen to 53 basis points at the close on Friday, versus the record of 33 basis points set in June 2007.
The spread hit about 450 basis points at the height of the financial crisis in March 2009.
Hitting that milestone would be another sign of how fears for the creditworthiness of so-called investment grade companies has evaporated, in particular since the ECB announced in March last year it would include corporate credit in its monthly asset purchases.
A comparison to the boom years also highlights how the market has grown much larger and riskier than a decade ago, when judged by the typical credit rating of borrowers and the sensitivity of bond prices to damage from higher interest rates.
The iBoxx index references €1.7tn of notional securities, compared with €0.7tn in June 2007.
Growth over the last decade has included much more issuance of bonds rated BBB, the lower end of the spectrum for companies judged investment grade by credit rating agencies. From 27 per cent of the notional value of the index in 2007, the proportion of triple-B borrowers is now 49 per cent.
Citi calculates that if adjustments are made to reflect the overall deterioration in credit quality, the equivalent index spread today would be 41 basis points, or just 8 basis points more than the all-time low.
Other measures of spreads are at less extreme levels. The Merrill Lynch corporate bond index is broader, as it includes smaller debt issues than the iBoxx index.
For the Merrill Lynch index, the spread over government bonds was 93 basis points on Monday, which compares to an all-time low of 36 basis points set in 2005.
Tom Moulds, a portfolio manager for BlueBay Asset Management, said “do I really think we’re banging up against the most expensive levels all time levels for credit? I don’t think we’re there yet”.
He said that, for a euro investor holding cash, it still made sense to buy investment grade debt as the next safest alternative after a negative yielding bank account and the very low yields available on sovereign debt.