Europe Inc. Rushes to Sell Bonds as ECB Gets Set to Buy
Deutsche Telecom gets enthusiastic reception for €4.5 billion debt sale as central bank’s plan reshapes the market
Deutsche Telekom AG wasted little time Thursday after learning that the European Central Bank would start buying corporate bonds later this year.
That afternoon, officials at Germany’s telecom giant began lining up the company’s first euro debt deal since 2013, to take advantage of the sharp drop in borrowing costs the ECB’s plan should trigger, according to a person familiar with the matter.
By the end of Monday, Deutsche Telekom had sold €4.5 billion ($5 billion) of bonds after receiving around €18 billion of investor orders.
The speedy debt sale—and its enthusiastic reception from investors—signals how the ECB’s almost unprecedented program has altered the complexion of Europe’s corporate-bond market.
“Companies have reacted, and they’ve reacted quickly, to take advantage of the better market conditions after the ECB” announcement, said Jeff Tannenbaum, a managing director at Bank of America Corp.
“The market feels as busy, and it feels as good as it has been the whole year,” he said.
European credit markets soared after the ECB’s surprise announcement Thursday, despite details of the plan remaining sketchy.
The buoyant mood spilled over to U.S. corporate-bond markets, which also moved higher.
The rally has sparked a flurry of bond deals from European companies, which have been snapped up by investors ahead of a huge new buyer coming into the market.
Monday was the second-busiest day of the year for new debt sales of euro-denominated investment-grade corporate bonds, according to data provider Dealogic.
Before that, it had been the slowest start to the year for such sales since 2011, during the continent’s sovereign-debt crisis.
The buoyant mood extended to the dollar-bond market, where UBS Group AG Monday sold the first contingent convertible, or CoCo, bonds in nearly two months following a sharp selloff in this new breed of risky debt in February.
More companies flocked to the euro debt market on Tuesday, including lenders Royal Bank of Scotland Group PLC and Banco Santander, German conglomerate ThyssenKrupp AG and Portuguese company Brisa-Concessão Rodoviária SA.
“The market had pretty much been closed up until the ECB,” said Chris Telfer, a portfolio manager at ECM Asset Management. “The ECB has certainly kick-started things.”
The central bank hasn’t said how much, or exactly which, corporate bonds it plans to buy. It has ruled out buying bank debt, and says it will be restricted to investment-grade euro-denominated debt belonging to nonfinancial eurozone companies.
The program will form part of the bank’s broader bond-buying, which it has expanded from €60 billion to €80 billion a month.
Investors reacted to the announcement by buying first and asking questions later. In Europe, the annual cost of insuring against a default on European investment-grade corporate debt for five years fell to its lowest level Friday since August, according to Markit.
“If you’ve got the ECB coming to buy potentially up to €15 billion of corporate bonds per month you know that [the market is] going to react,” said Bryan Wallace, a portfolio manager at JP Morgan Asset Management.
Mr. Wallace said it has become difficult to buy bonds in the secondary market since the ECB’s program was announced. That means investors have had to rely on primary markets—buying directly from the issuer—if they want to get hold of corporate debt.
That led to bumper order books on new bond deals Monday.
Investors flooding Deutsche Telekom’s sale with buy orders allowed the company to increase its targeted deal size by €2 billion to €4.5 billion. UBS’s $1.5 billion CoCo deal received $8 billion in orders and ended up paying an interest rate of 6.875%—below initial guidance and the same rate it paid on CoCos last summer, before the convulsions that have hit the European banking sector.
Still, bankers say the deluge of issuance may not continue apace.
Marco Baldini, a managing director at Barclays PLC, said it is too early to tell whether the ECB’s program will unleash a huge amount more bond supply, or whether companies will wait for borrowing costs to fall further.
“Does the ECB unlock more issuance rather than lock it up? That’s the big debate,” he said.
European credit markets fell slightly Tuesday, weighed down by the recent heavy bond supply and a selloff in stock markets. As a result, new bond deals weren’t being priced as aggressively as on Monday, said Bank of America’s Mr. Tannenbaum.
It also isn’t clear if European companies are desperate to borrow more money. The average yield on investment-grade euro-denominated debt was 1.3% before the ECB meeting, according to Barclays. The yield, which falls as prices rise, was 1.1% Monday, the latest available data.
Ultimately, the ECB’s buying “doesn’t change credit markets fundamentally. Companies could already borrow cheaply,” said Mr. Telfer.