Booming sterling market shakes off central bank exit

By Laura Benitez

LONDON, April 28 (IFR) - Local (Stuttgart: 19549987.SG - news) and international companies were out in force in the sterling market, helping the sector continue its impressive run this quarter despite the Bank of England pulling the plug on its bond buying programme.

The sector has been on a tear since last summer, when in response to the vote to leave the European Union, the BoE (Shenzhen: 000725.SZ - news) said it would use its firepower to buy corporate paper from September 2016.

Ahead of the central bank announcing the completion of its £10bn corporate bond purchase scheme (CBPS) - 11 months earlier than originally scheduled - there was some trepidation that the vibrancy of the market would be undermined.

But this week US consumer company Procter & Gamble (Swiss: PG-USD.SW - news) raised £750m in its first sterling outing for 15 years, and UK utility Thames Water paid only a minimal premium for its second dual-tranche trade of 2017, a £550m subordinated note carved into six and 10-year maturities. The deal attracted £1.4bn of demand.

Meanwhile the significant pipeline primed for next week's business indicates that activity remains healthy.

"The sterling market was fully functioning before the Bank of England introduced CBPS," said Marco Baldini, head of European bond syndicate at Barclays (LSE: BARC.L - news) .

"And it has remained well bid since the BoE's CBPS completion announcement which itself was expected, and since the bank is not active in the sterling primary market, I would argue that the transmission mechanism between the sterling secondary market is in any case less direct."

DOUBTS RAISED

Nonetheless the BoE's withdrawal and upcoming Brexit negotiations have prompted some to begin questioning sterling as a strategic market for international borrowers.

"It's a home-grown market and one that has provided issuers and investors with duration of up to 40 or 50-years, but we expect more credit spread widening, and therefore more international companies will lose the rationale for issuing," said one senior official at a US bank.

As the market anticipated an early end to the BoE programme, initially slated for March 2018, spreads widened 4bp earlier in April. However, they have since recovered, with the iBoxx GBP non-financials index at Gilts plus 135bp at Thursday's close, 6bp tighter than when the BoE announced its programme in August.

And the more prominent sterling houses argue that the UK market still has a lot to offer.

"Clearly, there is some uncertainty around the Brexit negotiations, but we fully expect the sterling market to continue to offer attractive financing options to international borrowers as well as domestic," said Jonathan Peberdy, head of syndicate at NatWest Markets.

"The sterling market has always proved resilient in times of adversity, it has a large and sophisticated community of investors and the UK will remain a large and important economy."

Sterling has typically been the go-to European market for borrowers and investors alike in need of duration.

Over the past three years 37% of sterling corporate supply has been at 15-years or longer; the equivalent figure in euros is 5%, according to NatWest Markets.

"It remains the local base for a range of UK corporates to raise money and enables issuers to raise very long term debt, as well as price more complex/esoteric structures," said Jonathan Platt, head of fixed income at Royal London Asset Management.

FLOODGATES OPEN

The central bank has so far bought £9.978bn of bonds as part of the scheme (settled as of April 26), and is expected to announce the final weekly purchase volumes next week.

That is equivalent to around half of the £20bn of sterling corporate investment-grade issuance seen since the programme was announced.

However, the removal of the BoE's backstop bid is not expected to deter issuance in the near term, with spreads forecast to hold steady following a string of successful deals last week.

The pipeline includes global engineering group GKN Holdings, which will hold investor meetings next week for a 12 to 15-year benchmark deal.

In the high yield crossover space, insurer Saga plc (Frankfurt: 2S8.F - news) , Ba1/BB+ (Moody's/S&P), will meet investors in London and Edinburgh from May 2 for a debut, likely seven-year, benchmark.

The market can also expect to see some M&A supply from BAT as its acquisition of Reynolds draws closer.

BAT intends to refinance two bridge facilities and said it would sell a mix of debt in US dollars, sterling and other currencies, although investors expect most to be in dollars. (Reporting By Laura Benitez, editing by Alex Chambers and Julian Baker)