"In the future, companies will increasingly turn to bond issues over traditional bank financing." October 25, 2012
"In the future, companies will increasingly turn to bond issues over traditional bank financing."
José Antonio Ordás, Global Director of Credit at BBVA Corporate & Investment Banking, analyzes the global fixed income market situation and the challenges that lie ahead. BBVA is positioned as a top-quality alternative, thanks to its wide investor base, its advisory capacity and its market expertise.
Q: What does the fixed income market currently look like?
In the past 10 years, the debt market has gone from a nominal value of outstanding bond issues of roughly US $40,000 billion to nearly US $100,000 billion. The origins of the economic crisis are rooted in excessive leveraging. However, although the market size has not shrunk, the breakdown among financial entities, governments and companies has indeed changed.
In particular, in 2012 the volume of issues decreased with respect to previous years. We also saw a continuation of the same trend noted recently, namely growth in government and company issues and a decrease in issues from the financial sector.
There have been both positive and negative trends in the market. Positive trends include the fact that, for companies and governments, the bond market has gained importance relative to traditional financial (bank) debt. This phenomenon will continue in the coming years, and the debt market will continue to grow. Negative trends include fragmentation in the European market, which has become increasingly local, with the gap widening between the "core" countries and the peripheral nations.
From the year-end perspective, we see that central banks around the world have injected liquidity into their markets, and this liquidity has to be invested somewhere. This has given rise to a search for new issues and, therefore, to a reduction in spreads. Together with the good monetary and political news in Europe, the picture at year-end has improved for debt markets in general, and Spain in particular.
Nevertheless, the US dollar market continues to be by far the largest market in the world. This will not change in 2012, given that growth in that market is expected to be much greater than in other markets.
Q: Going forward, what challenges do you see for the sector?
A number of major challenges will arise in the near future.
First and foremost, the low yields. In a prolonged situation of low interest rates, coupled with lower issue needs, the main challenge for investors will be how to secure minimum returns on their capital (for example, mutual funds, insurance companies, etc.). We therefore expect to see investors turn to lower-ranking products offering higher returns, such as high yields, emerging markets, hybrids, etc.
Secondly, generation of banking capital. In a deleveraging banking market, it will be more important to generate capital than it will be to generate liquidity. Consequently, we may see even greater decreases in financial volumes, liability management exercises in capital markets and capital-generating issues.
Lastly, segmentation in the European market and deleveraging of governments pose additional challenges, although not in the immediate future.
Q: How is BBVA meeting these challenges?
Firstly, we are shoring up our value chain integration strategy, from distribution to investors back to creation of the issues at companies, governments or financial institutions, both for the primary and secondary markets. BBVA Corporate & Investment Banking has a very clear customer-centric strategy, focusing on our core geographical areas and on sectors in which we already have solid expertise. The Credit markets team follows this same strategy, meeting our issuer clients' needs throughout the value chain. The majority of our issuer clients are located in Southern Europe, Latin America and the United States, through Compass.
Secondly, and in particular in debt capital markets, we are adapting our teams to the new market characteristics, increasing our advisory teams in areas such as liability management, debt advisory, and capital management.
Thirdly, we are placing more emphasis and resources on cross-border distribution, such as Latin-American dollar-denominated bonds, European corporate bonds denominated in dollars or local Latin-American currencies, or bonds in local currencies with American investors.
Lastly, we are ensuring that we have adequate coverage of institutional customers – i.e., investors –, so that the bonds issued by our clients can be placed.
Q: What is BBVA's market positioning?
In the last few years, BBVA has gained a strong position in the fixed income market, increasing its teams and establishing locally-based ones in order to get closer to our clients and to gain greater insight into their wants and needs.
In addition to the fixed income teams, the bank has invested in creating added-value teams (for example, debt advisory and liability management). Our clients immensely value the global advisory they receive from these teams.
Our leadership in Spain and Latin America in local currencies, together with our increasing presence in different fixed income markets (Spain, US, and Latin America in dollars) places us in an optimal position for advising our clients on their best financing alternatives.
Lastly, from the point of view of the investor, we are undoubtedly a key player in the bond markets in Southern Europe, Latin America dollar and in local currency. We are also foraying into the US market in names and sectors connected with Compass.
Q: What are BBVA's competitive advantages?
To begin with, we have teams at the creation, syndication and sales levels, in Europe, the US, Latin America and Asia. This allows us to offer our clients a truly global vision, and advice and support them in those markets in which they are most competitive.
In addition, we have local teams in place to sell issues to investors. This allows us to meet the needs not only of large investors, but also of medium and small-scale investors, offering issuers an interesting way to diversify.
Our unique market position in Latin America is also key, as we are able to offer our issues to an emerging investor base, and vice-versa.
Lastly, our Credit team brings total commitment to each and every transaction it handles, with a exclusive focus on primary issues and a clear liquidity target with secondary issues; i.e. creating an integrated value chain.