Britain's stunning vote to quit the European Union roiled the global markets, but borrowers raising debt in the US may turn out to be largely immune to the turmoil.
Britain’s stunning vote to quit the European Union roiled the global markets, but borrowers raising debt in the US may turn out to be largely immune to the turmoil.
The surge into safe havens such as US Treasuries – the 10-year dropped to as low as 1.42% at one point, before edging back up to 1.54% – has eased the cost of borrowing for US companies lined up for months to raise new capital.
Companies now have the ability to raise debt at levels not seen in years.
“Clients would be remiss not to see this as an opportunity, given where yields have fallen,” said a senior capital markets banker on Wall Street who asked not to be named.
“Spreads are still tighter than they were one to two weeks ago, and we’re already seeing a bit of a bounce back.”
The shock decision to leave the EU – something nearly every poll and survey got wrong – has flustered nervous markets wary of the potential volatility from Britain’s departure.
The referendum sent US volatility index VIX up 40% to 23.99 from 17.25 close on Thursday.
But for an investment-grade bond market that has seen consecutive years of issuance increases, Brexit is expected to prompt nothing more than a temporary blip.
“There are plenty of credits in the US that aren’t affected,” said another syndicate banker. “I’m sure that for utilities and those kinds of credits, the execution will be fine.”
New issue concessions may be a bit more elevated – in the region of 20bp-25bp – but that is unlikely to significantly affect the cost of financing, which is still technically at multi-year lows.
Despite the headline chaos, bankers and analysts alike said the market response to the vote was still fairly orderly – and that new debt issuance was expected to resume fairly soon.
“More accommodative central banks globally, lower rates for longer and political uncertainty – those are the big takeaways,” said Mark Howard, head of US credit strategy at BNP Paribas.
“I would characterize the markets as orderly. Most people that needed to trade have been able to overnight. There was no scramble,” he told IFR. “There isn’t dramatic price action.”
High-grade borrowers had put the brakes on issuance over the past fortnight, with just US$7.28bn of deals sold.
Analysts said the EU treaty will remain in place until negotiations with the UK are complete, and an exit plan has been approved – which could take months or even years.
“We don’t think the vote will have a meaningful impact on US growth,” said Jon Duensing, deputy chief investment officer at Amundi Smith Breeden.
“The cost of generic IG debt went down 10bp. That is still very attractive financing for those who are looking for it.”