Posted by on February 10, 2017 3:55 pm
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Categories: Bond Business Corporate bond Credit Credit Rating Agencies debt Economy European Central Bank European Union Finance Financial market Fitch france France’s government French government germany italy money Mortgage-backed security Netherlands ratings Sovereign Debt Standard & Poor's United States housing bubble Volatility

Despite solid investor appetite for riskier, corporate bonds, it appears that political uncertainty across Europe is startng to create problems for the region’s so-called ‘safest’ borrowers. As Bloomberg reports, France’s government-linked development agency postponed a $1 billion bond sale this week, citing market volatility, while a junk-rated shipping company managed to increase the size of its sale.

In a week dominated by bond sales from sovereign and financial issuers, corporate borrowers accounted for three of the four most subscribed deals. Molnlycke Holding AB tops the list, as the surgical product maker’s first debt sale since 2015 pulled in bids nearly 5.4 times the 500 million-euro ($532 million) issue. Investors also clamored to buy Ryanair Holdings Plc’s first bonds since 2015, which it sold two days after reporting earnings.

But while junkier issuers are in great demand, the safest borrowers are in trouble…

Agence Francaise de Developpement received insufficient orders because of investor concern that the notes would suffer in line with French government bonds amid the country’s fragmented presidential election, according to head of treasury Bokar Cherif.

AFD, which holds the third-highest investment-grade rating and provides funding for sustainable projects in developing countries, may wait until after elections in April and May to resume the sale, Cherif said in a phone interview. It’s rated AA at S&P Global Ratings and Fitch Ratings.

“The performance of our notes is completely pegged to the French sovereign,” Cherif said. “Investors are trying to get a grasp of the political situation in France. The only thing we can really do is acknowledge that there are worries and take them into account in our plans.”

Some top-rated borrowers are vulnerable to price swings in sovereign debt because their fortunes are so closely linked to underlying rates. The threat of an anti-establishment president in France, along with elections from Germany to the Netherlands, potential deadlock in Italy and Britain’s negotiations to exit the European Union may damp investor demand for the highest-rated notes at the same time as the European Central Bank prepares to curtail its purchases.

“There’s a lot of known political risk in Europe this year,” said Roger Webb, a London-based investment director at Aberdeen Asset Management Plc, which manages about 303 billion pounds ($381 billion).

“We shouldn’t be surprised if there are periods during the year when deals get pulled because the underlying government bond market is particularly volatile.”

The core of Europe is starting to diverge as policy uncertainty soars and ‘whatever it takes’ fades…

“It’s quite surprising that a borrower that’s that high quality would feel the need to pull back,” said Gordon Shannon, a money manager at TwentyFour Asset Management in London, referring to AFD. “It’s a big signal to the stress that’s starting to build here.”

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