Where will new issues find a home after Brexit and US election?

Published on 11 January 2021

Where will securities be issued in 2021 following Brexit and US election? Charlie Walker head of equity and fixed income primary markets at London Stock Exchange Group and Eric Vanraes, head of fixed income investment and Banque Eric Sturdza give us their perspective on the avenues for issuer appetite and investor appetite to flow this year.

Dan Barnes Welcome to Primary Markets TV, I’m Dan Barnes. This is the 11th of January, and today we’re going to be looking at some of the big issues affecting where new issuance occurs, for both the bonds and equity markets geographically, following Brexit at the start of the year, and various political and economic changes over 2020. Joining me today are Charlie Walker, head of Fixed Income and Equity Primary Markets at the London Stock Exchange Group, and Eric Vanraes, head of Fixed Income Investments at Banque Eric Sturdza. Guys, welcome to the show.

Charlie Walker Hi Dan, thanks for having us.

Eric Vanraes Hi, Dan, thank you. And nice to be with you today,

Dan Barnes Charlie, can I start with you? How does leaving the EU affect the connection between investors and issuers in London?

Charlie Walker London is one of the major financial centers of the world, and companies and investors come to access the London markets for a variety of reasons. There’s a globally recognized, regulatory regime, it’s one of the most liquid markets in the world. They have an extremely sophisticated analyst, advisor, and investor community that based here. There’s the English language. There’s a time zone which works perfectly between the US and China, and there’s a world renowned legal system, and we don’t expect any of that to change. So, what we do see is the capital markets are becoming increasingly global in nature. Capital flows across borders more than it ever has done before, and investors look to allocate that capital anywhere around the world where they feel that they’re going to get the best returns. European investors buy securities that are listed in the US. They buy them in Shanghai, they buy them Hong Kong and they buy them in London. On the LSE, just around 40% of the companies now are actually international companies. So they’re not headquartered, incorporated in the UK, or they don’t have their primary place of business in the UK, so it’s a hugely international market. And that’s only on the issuer side. If you then think about it on the investor side, now, over half the securities that are actually listed in London are owned by international fund managers. The exchange is a meeting point in other words, for global investors and global companies, and again, we don’t see that changing. Today 99% of the companies that are listed on the London Stock Exchange can be bought by e-based investors in exactly the same way they always have been able to before. So, in terms of the connection between investors and issuers, we don’t expect there to be a material impact, because we expect European investors to look to access the most exciting propositions, globally.

Dan Barnes On that basis then, what’s your expectation for IPOs and for bond issuance in London over 2021?

Charlie Walker So we expect activity on both fronts. In 2020, both the equity and the debt markets saw very elevated levels of issuance, and there was a variety of reasons for that, but obviously the pandemic was the big one. If you look on the equity side, we had over 50 billion pounds of equity raised on the London Stock Exchange last year. Now, just to put that in context, that was most active equity market in the world outside of the US and China. It’s also the most equity capital that’s been raised since the financial crisis in 2009. Now, what was interesting is that in the first half, the focus was very much on recapitalizing companies that were already listed. So 40 out of that 50 billion pounds roughly was by companies already listed on the exchange. And that, for the most part, was to get companies through the pandemic. What you did see, though, was the IPO markets were quite quiet in the first half, and that was with investors really just wanting to refocus and focus on recapitalize companies already listed on the exchange. In the second half, you started to see attention turning back towards the IPO markets. Then you started to see IPO issuance pick up in the second half. So for next year, we expect that trend to continue. We think there will continue to be some recapitalizations. You’re seeing more capital being raised for growth opportunities now, not just balance sheet-strengthening. And it looks as though the IPO market in particular is going to be particularly strong in 2021 from what we can tell today.

Dan Barnes And then, how are issuers actually engaging with you over 2021, and are there any particular themes which you’re seeing develop amongst issuers?

Charlie Walker I think on the IPO theme, you’ve seen that over the last 24 months or so, there’s been quite a lot of events in the calendar that has meant people have wanted to avoid those events, and that’s elections in the UK, but globally as well. You’ve seen that with the US. Obviously, there was the Brexit, the pandemic as well. If you think that IPOs typically can only get done in certain windows, that led to some companies thinking, ‘well, we’ll wait for some of these issues to clear before we decide to list on the market.’ So, people are suddenly expecting that in 2021, hopefully some of that that uncertainty now is lifted, and therefore we’re seeing companies that ideally would have wanted to access the markets over the last 24 months or so, planning to do so in 2021. I think there’s probably a couple of key themes that we’re expecting to come through this year. I think one is, we’ve seen less UK companies list over the last couple of years, particularly SMEs, small and medium sized businesses, there’s been a sort of gravitation towards large-cap companies listing. UK SME’s seem to be preparing for 2021 to be they year they’re looking to access the markets. And then there’s a sector focus; you’ve seen recently investors very much looking to get access to technology and green, renewable opportunities, and those two sectors look like they’re going to be a sort of key focus for 2021.

Dan Barnes Very good, thank you. And Eric, can I turn to you now, so looking at the fixed income markets, in which regions do you expect to see the greatest investor interest for debt this year?

Eric Vanraes Mainly in Asia, probably, and particularly in emerging markets, probably South America, but in Europe, I am very excited by three big themes. First and foremost ESG SRI will be one of the key topics of the year. Secondly, 2021 will be the year of hybrid debt, because a lot of companies need to restore the quality of their balance sheets. The economic difficulties will generate more investment opportunities, so I’m waiting for more M&A activity this year. And when there is more M&A activity and when companies need to restore the quality of their balance sheets, hybrid corporate debt is a fantastic way to do so. The third point is UK; in continental Europe, due to Brexit uncertainties, UK was sometimes dramatically underweight in portfolios, because when there is uncertainty, you don’t really invest. The big uncertainty is now over and I think that a lot of people like me in continental Europe, will be more comfortable investing in primary markets when there are opportunities for British companies.

Dan Barnes That’s great. Thank you. And can you give us an idea of the sort of new issuance levels you might expect for 2021?

Eric Vanraes I think it will be more than in 2020 for two reasons. In 2020, a lot of companies wanted to wait and see, during the pandemic crisis. Secondly, the consensus in the bond market is that global yields will increase. So, if you are the CIO and CEO of a company, to take advantage of very low, negative yields in Europe and very low yields in US dollar, if you need to launch a new bond issue, you have to do it right now in Q1, because nobody knows. German bund yields could increase slightly. US Treasury yields could increase more importantly. So, if you need to issue a new bond, it’s now.

Dan Barnes With the amounts of investable assets changing relative from last year, to 2020, how might that potentially impact market liquidity?

Eric Vanraes In the corporate bond market, unfortunately, the liquidity is driven by central bank purchases. So, it’s a very difficult question, because I can imagine that new issues could be potentially bought by the ECB, and against all odds hybrid bonds, in certain cases, could be more liquid than the senior debt, because the senior debt is bought by the ECB. So, if you want to buy a single A-rated, German company, today, it’s almost impossible. But if you want to buy the hybrid bund of this company, it’s really easy, because the ECB don’t buy the hybrid. So liquidity is higher in the hybrid market than in the single market. And it’s not obvious, because it’s not normal, it’s not logical. But in the current environment, with the central bank purchases, the market has totally changed.

Dan Barnes Guys that’s been great. Thank you very much for your time today.

Charlie Walker No problem at all. Speak soon!

Eric Vanraes Bye!