Coronavirus, low interest rates and credit quality doubts impact debt, yet some players still show considerable optimism.
Before the recent coronavirus outbreak and the disruption of markets and supply chains, the debt markets began showing troubling signs. Years of low interest rates pushed investors seeking better returns out of government bonds toward corporate issues, but these started to show signs of deteriorating quality. Companies will suffer lower or non-existent profits in many sectors. Although supply chains, production, travel, tourism, retail commerce, trade, and business and consumer confidence are affected, all is not lost; many players show surprising optimism about the short and the long term.
Global Finance spoke with winners of this year’s annual World’s Best Investment Banks awards about the state of fixed income in regions throughout the world in 2019-2020. The global winner for Best Debt Bank is Singapore-based DBS. In 2019, DBS saw a rise in net profit of 14% to $6.4 billion. Total income increased 10% to $14.5 billion from loan growth, a higher net interest margin and double-digit percentage growth in non-interest income.
“The Asian debt market continues to be an exciting growth area,” says Clifford Lee, global head of Fixed Income at DBS. “The opening up of very sizable local bond markets; the expected continual growth in new supply, buoyed by much required infrastructure spending; firm economic growth in the region; alongside ample investable funds in Asia amidst a low-interest-rate environment; all point to further expansion of the Asian bond market, in terms of size and depth.”
“The well-known fact that Asian bonds are generally better supported with the ‘Asian bid’ [Asian companies rely heavily on bond markets, mostly ones operating with the US dollar], even in a market sell-off, compared to other emerging market bond sectors, will make them an increasingly attractive asset class for non-Asian fixed income investors, thereby increasing the market participants and bringing about improved market liquidity,” Lee adds.
Goldman Sachs took the spot for Best Debt Bank in North America. According to Clare Scherrer, one of two global co-heads of the industrials group in the investment banking division, “2019 benefited from a continued robust US economy, low unemployment, low inflation and strong consumer confidence. Macro headwinds included trade tensions, slowing earnings growth and potential recession risk. Sentiment continued improving toward the end of the year, as many of these concerns abated.”
UBS took top honors in Asia-Pacific and pointed to reasons for optimism, despite current troubles. “Debt markets came out of the blocks strongly, with volumes up year-on-year in January and the first half of February, buoyed by robust participation from India, elsewhere in Southeast Asia and, of course, China,” says Gaetano Bassolino, UBS head of global banking, Asia-Pacific. “The tone, supported by a low interest rate environment in which investors are seeking both duration and yield, is likely to continue, given the recent interventions of central banks.”
“In my view, 2020 has the potential to be another record year for Asia G3 and, depending on the overall impact of the coronavirus outbreak, could surpass 2019 in overall volumes and, at the same time, exhibit greater diversification by region and product than in recent years,” he adds.
The winner in Central and Eastern European is Renaissance Capital, which last year completed 26 deals worth more than $6.5 billion overall. The most notable inaugural issues, according to Dmitry Gladkov, Renaissance acting global head of investment banking and global head of the financing group, included a $300 million high-yield bond offering for Trans-Oil, the first public capital raising out of Moldova; a benchmark $300 million Tier II bond issue for Sovcombank, one of the largest private banks in Russia; and a debut domestic Russian ruble issue for Eurotorg, the largest retailer in Belarus—the first cross-border bond financing for a Belarussian corporate in the Russian domestic market.
Green bonds and sustainable-financing vehicles were a topic on which a number of banks focused, in a host of different sectors. “We placed a debut €325 million Eurobond issue for DTEK Renewables—a pioneering green bond transaction, the first ever green bond out of Ukraine,” Gladkov notes in the press release.
The winning bank in Latin America is Bradesco BBI. Philip Searson, head of Fixed Income, says, “The current global low interest rate environment means that investors search for investment opportunities offering yield. Latin American issuers provide an attractive option, with Brazil in particular appealing to international investors, given its strong economic recovery driven by domestic fundamentals.”
“In the local Brazilian market, the base rate is currently at its historic low, which has resulted in the capital markets offering longer tenors and opportunities for new issuers to diversify funding. In particular, the longer tenors have resulted in the capital markets becoming a viable alternative for infrastructure investments,” Searson adds. “In terms of deals, in 2019 in the local market, we executed 137 deals with a total issuance volume of $44.3 billion Brazilian reals [about $11 billion at the end of 2019] and in the international market, we executed 26 deals with a total issuance volume of $16.6 billion.”
In Africa, Rand Merchant Bank (RMB) won the award for Best Debt Bank. “There are some current material risks, such as the coronavirus and oil price war, which have surprised the global markets. Africa is not immune to the effects of these risks,” says Nanagolo Phiri, Co-Head of Rand Merchant Bank’s Debt Financing Group. “However, it is clear that as things stabilize, Africa as an investment destination will continue to remain a key focus for investors seeking yield in a low interest rate environment.”
RMB sees mining, renewable energy and information technology as important sectors; and names three countries as best investment targets: Egypt, Morocco and South Africa—all for different reasons. In Egypt, the bank notes that “the enormity of the market size (which ranks second to Nigeria in nominal terms), paired with a sophisticated business sector relative to neighboring countries, makes Egypt the most attractive investment destination in Africa.” Egypt was also RMB’s top country for 2019 investment.
Middle Eastern countries are also suffering because of the virus outbreak. Our regional winner there is First Abu Dhabi Bank, the largest lender in the UAE. The bank is working on some big deals this year including one with Abu Dhabi National Energy Company, also known as Taqa, and Abu Dhabi Power Corporation.
In Western Europe, where projections for growth are limited, Global Finance’s choice for Best Debt Bank is Barclays. Barclays was very active in underwriting green and sustainability bonds across sectors and geographies in 2019 and aims to continue that trend in 2020. In 2019, the bank updated its Green Bond Framework to make sure it aligns with UN Sustainable Development Goals, according to the bank.
As the coronavirus continues disrupting the markets and changing daily routines, economists revise growth projections downward. A flight to quality will translate into interest in fixed-income products, observers say, despite the 10-year Treasury bond being at its lowest level ever.
BEST INVESTMENT BANKS FOR DEBT 2020
|North America||Goldman Sachs|
|Central & Eastern Europe||Renaissance Capital|
|Latin America||Bradesco BBI|
|Middle East||First Abu Dhabi Bank|
|Africa||Rand Merchant Bank|