What's ahead for issuers in EMEA Capital Markets in 2023?
Contributor: Pete Mason
22 Dec 2022
Contributor: Pete Mason
22 Dec 2022
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How will the end of cheap debt influence CFOs and boards planning their capital-raising activities? Our Co-Head of Capital Markets EMEA, Pete Mason, delves into the key themes that lie ahead, from shifting funding strategies to the rebalancing of capital structures.
1. The era of cheap debt is over
The post 2008 period for cheap debt is clearly over – for example the weighted average yield for public Euro bond debt from financials and corporates in the last nine months in EMEA has gone up 4.8 times.
The primary reason for the increased costs of debt has been the fact that central banks have pivoted to raise their base rates to combat rampant inflation.
The secondary reason is that credit spreads have widened dramatically in 2022 as the global economy has slowed down, with the added impetus being the energy crisis in this region leading to further risk off and credit spread widening.
2. CFOs will need to explore alternative channels to raise capital
Going forward, CFOs and issuers will need to think more widely about which markets they access to source capital.
In the last rate rising cycle between 2004 and 2007 we saw a significant increase in the volumes issued in the US convertible bond market.
We are seeing a similar uptick in volumes in the European convertible bond market and we expect that trend to continue.
Another market where we anticipate significant growth in 2023 is the private credit market or direct lending market where AUM are estimated to be at $427bn by the end of 2023, an uptick of 19% in just two years.
Deals in this market will come at or wider than the public market leverage finance equivalent levels. They’ll have tighter covenants, but they’ll be at lower multiple levels than we have seen in recent times.
3. Capital structures will rebalance towards equity
Due to debt being so cheap in recent years, leverage was maximised. A lot of the refinancing will have to be done through equity or equity-linked instruments.
For CFOs this means:
Getting the right mix between debt and equity
It means the retirement of excess debt through liability management exercises
And it will mean the issuance of equity capital
The good news is that:
Bond holders remain amenable for liability bond buy back exercises
And the public equity capital markets remain supportive of recapitalisations for the right management team, with the right strategy and the right capital structure.
And significant dry powder still exists within the European private equity sector looking for an attractive entry point for their investments.
Companies in the investment grade markets should see their funding projects come to fruition in 2023 albeit at an increased cost. Lower down the credit spectrum, those projects will need to take a more creative approach beyond the traditional public markets to be successful in 2023.
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About the expert
Co-Head of Capital Markets EMEA
Pete Mason has over 23 years of investment banking experience largely focused on Debt Capital Markets and therein FIG clients.
Prior to co-heading the Capital Markets Team in EMEA, Pete was Head of DCM EMEA following on from his role as Co-Head of the FIG EMEA Investment Banking team at Barclays and before that Head of FIG DCM EMEA at Barclays.
Prior to joining Barclays in June 2010, he served as Head of Citigroup’s Northern European FIG DCM business, a role he undertook post completing his MBA at INSEAD, France, and then acting as Chief of Staff to the CEO of Citigroup EMEA.
Pete has a MEng in Engineering, Economics and Management from Oxford University, UK; and is a member of both the UK’s Association of Corporate Treasurers and the UK’s Worshipful Company of International Bankers.