How has Natixis CIB successfully negotiated the stormy waters of the bond market?
Despite a complex political and economic environment, Natixis CIB has weathered ongoing turmoil in the bond market. Through a few questions, Gabriel Levy, Global Head of Debt Capital Markets (DCM) at Natixis CIB, gives an overview of the past year, touching upon the success and challenges faced in an unprecedented situation.
How can 2022 be summed up for the Bond Market in a single word?
Complicated! After two years of pandemic-induced turmoil, 2022 was characterized by an extremely tense political-economic situation and heightened geopolitical uncertainty. As inflation and interest rates soared, Central Banks began tightening monetary policy not only in Europe and the US, but across the world. Issuers have had to contend with a rising volatility, and spreads on the bond market more than doubled over the course of the year.
What is the implication of skyrocketing interest rates for bond players?
Amidst growing uncertainty, investors have become increasingly risk averse. As such, they have tended towards less risky assets, such as government bonds (govies) or covered bonds and have reduced the maturity of their investments by two-to-three years on average. The volume of euro-denominated bond issuance increased significantly for financial institutions – up 40% over the course of the year – while it decreased for others, including corporates (down 16%). The steep rise in interest rates has complicated the market for infrequent issuers. It has also driven corporates away from the primary bond market given they have been fully hedged as a result of very low rates over recent years. In some cases, issuers have drawn on bank facilities instead of issuing on the primary market – something we have not really seen in recent decades given the decrease in interest rates. It has also had a significant impact for Real Estate Investment Trusts (REITs), which have been facing significantly higher funding costs. These are difficult to manage given the yield on their assets, which appears to be lower in certain cases.
How has Natixis CIB handled the situation?
The proportion of financial clients within the Natixis CIB DCM business line is high (50% or above). As such, the explosion in Financial Institutions Group (FIG) issuances has had a positive impact. The strong results have also been driven by the diversified business mix leveraged by the situation. On the other hand, competitors that have a different split of FIG, SSA and corporate clients have suffered more as a result of the drop in SSA and corporate bond issuance. In addition, Natixis CIB’s strategy to move from being a pure Covered Bond house to a Global Euro FIG house has proven valuable in this period of market volatility.
How is the DCM team positioned in the Bond Market?
These excellent results have been driven by our diversifying portfolio and, notably, the dynamic expansion of our European client portfolio (particularly in Slovenia, Czech Republic, Austria, and Switzerland). Furthermore, the DCM team has maintained a position of strength in the United States thanks to its private placement business (USPP) and has increased its footprint in Asia by reinforcing its set-up, and its expansion in countries such as Korea and Australia. For example, Natixis CIB has been appointed as joint bookrunner for the largest ever public Eurobond transaction out of Korea of the Export-Import Bank of Korea (KEXIM).
What drives our success?
Both our technical expertise and our ability to provide clients with tailored advice have contributed to increased business success. The improvement and strengthening of alignment between the DCM, Advisory teams and Global Markets (Debt Syndicate, Trading, and Sales) has also been a key factor of our success.
Has the energy crisis led to a boost in ESG bond issuance?
It is hard to say with any certainty, but the energy crisis has encouraged market participants to rethink their strategies in order to truly support sustainable energy development. Issuing ESG bonds is a good way to satisfy investor appetite as they offer a stronger differentiation, which is particularly interesting in volatile markets.
Can ESG bonds provide protection against inflation?
Not against inflation, but against volatility. In a context where ESG bonds are fewer and investors usually are classified as “buy and hold”, ESG bonds are less likely to underperform in periods of high volatility.
Have rising interest rates increased the supply of inflation-linked bonds?
This could be the case, but it is quite difficult for issuers – and especially corporates – to measure the impact of inflation on their businesses. Consequently, the main inflation-linked bond issuers are states, not only because they can determine inflation quite easily, but also because their bonds are very liquid, and this abundant liquidity is appreciated by investors. As an example, France issued the first ever sovereign green bond indexed to inflation in 2022, in which Natixis CIB acted as joint bookrunner.
What can be expected in 2023?
2023 could start well in terms of issuance volumes, supported by redemptions in TLTROs and a reduction in ECB purchase programs. Peak volatility is probably behind us, even if credit spreads could continue to widen in 2023. Interest rates are likely to remain high for a large part of 2023. In this environment, investors should have a stronger appetite for higher returns, which should sustain higher activity in primary bond markets.
#2 Global euro financial institutions bonds, 1H22, Dealogic
#3 Global green/sustainability-linked loan coordinator, 2021, Dealogic
- GlobalCapital Bond Awards 2022, GlobalCapital
- Covered Bond Awards 2022, Global Capital
- Best FIG EUR Bookrunner/Dealer, CMD Portal Awards 2021
- Best Investment Bank France, Global Finance Awards 2022
Abbreviations and acronyms:
- CIB: Corporate & Investment Banking
- DCM: Debt Capital Markets
- ECB: European Central Bank
- ESG: Environmental, Social, and Governance
- FIG: Financial Institutions Group
- REITs: Real Estate Investment Trusts
- SSAs: Sovereigns, supranationals and agencies
- TLTROs: Targeted longer-term refinancing operations
- USPP: US Private Placement