News at the end of last week that President Joe Biden and House Speaker Kevin McCarthy had reached an agreement over raising the US debt ceiling has provided some short term relief for European ECM but there are growing fears over the impact on equities of US government refinancing in the months ahead.
The announcement of the deal last week has lessened concerns over an imminent catastrophe and several issuers have taken the initiative to deal in what remains an open window for European ECM.
On Tuesday evening, Mexican conglomerate FEMSA sold a EUR 2.4bn slice of Heineken NV [AMS:HEIA] and a EUR 900m chunk of Heineken Holding [AMS:HEIO] overnight in its second mega sell-down of Dutch brewer this year, as flagged by this news column a couple of weeks ago and recently by this news service’s lock-up tracking service.
The larger Heineken NV slice, a 4.6% stake of the listed company, was sold at around a 4% discount to the close, a Dealogic Price of Liquidity ratio of -0.87x; in line with recent mega blocks also a tight print compared with the market average.
On Wednesday, the IPO market also re-opened, with a prospective London listing for Turkish soda ash company WE Soda. It could subsequently be joined in the market by a carve-out of Nucera, the hydrogen business of Thyssenkrupp [ETR:TKA], as per reports.
“The market is less worried now and some trades have done incredibly well,” said an ECM banker. “Others are coming, and no one is terrified like last week.”
A second ECM banker said that there had been some talk by issuers of postponing deals until after summer when it looked like a resolution was unlikely before the US Treasury was set to run out of funds, around 5 June.
“The thing is that we have not seen this type of financial event before so there was uncertainty because we don’t know how markets will react; if you think about it [it] is a technical phenomenon [but] it could have very concrete consequences,” this banker said.
A source close to the secondary listing of Hong Kong-listed Italian yacht manufacturer Ferretti [HKG: 9638] in Milan, which was launched on Monday 29 May, expressed relief that there seemed to be a resolution to the debt ceiling talks.
“With the positive turn on the debt ceiling talks the markets could react well,” they said adding that it was a positive for the deal.
While the talks now must be ratified in Congress there were hopes that this represented a mere formality and that confidence has allowed issuers to get to work this week.
Liquidity squeeze
While a deal between Biden and McCarthy starts to offset the unthinkable scenario of the US being unable to meet its financial obligations, equity markets are not completely out of the woods yet.
The delay in raising the debt ceiling means that the US Treasury is close to running on empty, so as soon as the ceiling is raised, the Treasury will need to refill its coffers quickly to repay its obligations.
A third ECM banker says this is causing some concern within internal strategy teams pointing to a concerning correlation between monetary liquidity and equity markets.
Following the last time the debt ceiling was raised, 16 December 2021, the Treasury grew the General Account from USD 84.95bn on Dec 22 to USD 697.84bn on February 23, according to data from the Federal Reserve, corresponding with a roughly 8% move downwards in the S&P 500 at the beginning of 2022.
The index fell a further 8% as the Treasury grew its account to around USD 946bn in early May, although some of the index moves were driven by Russia’s invasion of Ukraine at the end of February.
There are reported estimates that the Treasury will need to raise USD 1trn by the end of 3Q to pay its bills, sucking up short-term liquidity and a possible move down in equity markets.
“A drain on liquidity, even after a debt ceiling deal, could cause a market correction of around 10% according to our derivative strategists, and to be honest that might be something the market might welcome given the recent moves up,” said the banker adding “I am amazed more people aren’t talking about this.”
A fifth banker also noted concerns over the sheer volume of Treasury notes that would have to be issued by the US government and its impact on market liquidity.
“Bonds are seeing a real revival and those Treasury notes offer yield on what is now essentially a risk-free bit of paper, given the extension of the debt ceiling,” he said, adding that investors would likely be keen to put resources towards US government debt.
The first quarter of 2022 was a tricky time for ECM issuance, with European volume dropping 74% year-on-year and 67.4% from the fourth quarter of 2021, according to Dealogic data. While some of the lack of deal activity in the first quarter was linked to Russia’s invasion of Ukraine, it is worth noting that tanks did not roll in until February 24.
Well before Russia invaded, Europe had already seen three large IPOs cancelled, the listings of WeTransfer, Cheplapharm and Spanish bank Ibercaja.
Lower investor liquidity is hardly ideal for European deals, especially IPOs, given the performance of German web hosting business IONOS Group [ETR:IOS] and Italian gaming company Lottomatica [BIT:LTMC] – largely considered disappointing.
At the time, sources pointed to concerns over rising rates, which is now no longer the case with US rates at least likely to remain stable for some time.
But if strategists are correct in linking a flood of treasury issuance to lower equity market capacity, then USD 1trn of new US government issuance over the next few months is something that should give markets pause for thought.
There is only so much money out there.
