Brexit risks cloud out­look for bor­row­ers, in­vestors

Gulf Times Business - - BUSINESS -

Europe’s bond mar­ket may face an early year- end shut­down as Brexit risks cloud the out­look for bor­row­ers and in­vestors.

Com­pa­nies may hold off is­su­ing notes, par­tic­u­larly in ster­ling, as un­cer­tainty about the UK’s fu­ture trad­ing re­la­tions with the Euro­pean Union forces them to de­lay de­ci­sions about new plants and equip­ment. In­vestors may also be re­luc­tant to de­ploy funds if the UK fails to reach a di­vorce agree­ment due to the risk of an eco­nomic slow­down or po­ten­tial turmoil in bond and for­eign- ex­change mar­kets.

“A no- deal Brexit would re­sult in a lot of volatil­ity,” said Marco Bal­dini, head of Euro­pean bond syn­di­cate at Bar­clays Plc. “It wouldn’t just be the ster­ling mar­ket that would be af­fected ei­ther – the euro mar­ket would be hit just as badly.”

Cor­po­rate ster­ling bond sales have slumped 34% this year, ac­cord­ing to Bloomberg league ta­ble data, dou­ble the drop- off in the euro mar­ket, as Brexit con­cerns de­ter UK in­vest­ments.

Air­bus SAS, Scha­ef­fler AG and Smur­fit Kappa Group Plc are among com­pa­nies that have scaled back op­er­a­tions in the coun­try or warned about po­ten­tial cuts amid a lack of clar­ity about trade ties af­ter March.

“Is­suance is down pri­mar­ily on that un­cer­tainty,” said David Ka­timbo- Mug­wanya, a fund man­ager at Eden­tree In­vest­ment Man­age­ment Ltd, which over­sees about £ 2.7bn. “The lack of a di­vorce deal could well push more is­suers to the side­lines.”

UK Prime Min­is­ter Theresa May has be­gun brief­ing her cabi­net on the text of a near- com­plete Brexit deal, as she seeks to smooth the coun­try’s de­par­ture from the EU. She faces the chal­lenge of gar­ner­ing sup­port from hard- lin­ers in her own party, as well as find­ing a way of avoid­ing a hard bor­der be­tween North­ern Ire­land and the Re­pub­lic of Ire­land.

Fail­ing to square this cir­cle could dis­rupt Europe-wide sup­ply chains, ground UK flights and hin­der trans­ac­tions in the con­ti­nent’s Lon­don­cen­tred fi­nan­cial mar­kets.

In­vestors in the for­eign- ex­change op­tions mar­ket also ex­pect pound volatil­ity to pick up, with a one- month gauge near the high­est since Fe­bru­ary.

Ster­ling bond spreads have widened to 151 ba­sis points this year, based on a Bloomberg Bar­clays in­dex data. A no- deal could force cen­tral­bank ac­tion, which would ease some of the pain for bond­hold­ers, said Paola Binns, a se­nior credit fund man­ager at Royal Lon­don, which over­sees 117bn pounds.

“They wouldn’t just let as­set prices col­lapse,” she said. “You’d ex­pect some sort of in­ter­ven­tion through QE.” In­vestors are also still lap­ping up ster­ling notes amid the lim­ited sup­ply. In­surer Le­gal & Gen­eral Group Plc got more than £ 2.2bn of bids for a £400mn sale this week. An of­fer from TC Dud­geon OFTO Plc, the op­er­a­tor an off­shore pow­er­trans­mis­sion line, was more than dou­ble sub­scribed.

The UK may be able to se­cure a di­vorce agree­ment, and May could visit Brus­sels within days to trig­ger the fi­nal phase of ne­go­ti­a­tions, ac­cord­ing to EU of­fi­cials. The risks posed by a no- deal di­vorce may also per­suade UK law­mak­ers to back any ac­cord.

A di­vorce agree­ment could help re­vive ster­ling bond sales. Still, the need for a per­ma­nent EU-UK trade agree­ment will con­tinue to cause un­cer­tainty and drag on is­suance, said Ka­timbo- Mug­wanya.

“The avoid­ance of a no- deal sce­nario will be a good thing, and you could see some is­suers step back in,” he said. “But they’d want to get a feel for how trade ne­go­ti­a­tions are pro­gress­ing be­fore com­ing back fully.”

Cor­po­rate ster­ling bond sales have slumped 34% this year, ac­cord­ing to Bloomberg league ta­ble data, dou­ble the drop-off in the euro mar­ket, as Brexit con­cerns de­ter UK in­vest­ments

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