Corporate Treasury Weekly: the UK’s bold new coronavirus policy raises risks in both directions

08 July 2021

Giles GaleHead of European Rates Strategy

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Breaking down trending trades & themes to help corporate treasurers get ahead of the latest issues shaping markets.

As the UK looks set to boldly go where few have gone before – the removal of all pandemic-related restrictions – we see economic growth rising broadly across all G3 regions. But with rising growth once again raising questions about a pull-back in central bank support and higher bond yields, corporate treasurers are focused on managing the cost of future funding.

  • The UK’s bold new coronavirus policy raises risks in both directions: the UK looks set to ease all pandemic-related restrictions (save on travel) by 19 July, and the key risk may be the progress of the Delta variant against vaccination progress. While we remain optimistic – virus-related hospitalisations and mortality appear to be decoupling – the UK will surely be a test case for other countries.
  • We’re more optimistic than most on economic growth – and have revised up our forecasts: improving business sentiment and coronavirus trends are pushing our forecasts higher – both in absolute terms and relative to wider market consensus. For the US, we expect gross domestic product (GDP) to rise 7.6% and 6.1% in 2021 and 2022, compared to 6.6% and 4.1% for the consensus (according to Bloomberg). For the Euro Area we see 5% accelerating to 5.8% in 2021 and 2022, compared to 4.5% and 4.2%.
  • The latest Fed minutes didn’t provide many hints at whether quantitative easing (QE) will be tapered earlier than expected: details of the June discussion around the Fed’s asset purchasing programme didn’t shed much light on the taper timeline. We still see the tapering discussion starting in December, but the risk may be that it starts earlier – in part because we suspect inflation may linger longer than the Fed expects.
  • Bond yields will start to move higher, but volatility should remain low: if growth expectations are revised higher alongside rising market fears of earlier-than-expected QE tapering, bond yields will likely start to rise. But higher rates and higher growth work against one another in credit, and in the short term, we think growth should continue to win out – which means demand for credit should remain strong.
  • A full easing of lockdowns in the UK should support Sterling: lockdown easing is pivotal for ensuring growth remains strong over the summer, and although growth in absolute terms should ease, stronger relative growth should support Sterling. FX markets appear to be focused more on coronavirus case counts rather than declining severity of infections, creating a small window for the currency to gain against other safe havens.

Sustainability-linked bonds gain traction among energy and petrochemical firms

The dual-tranche bond issued last week by Spanish energy and petrochemicals giant Repsol included a number of notable features that caught the eye of other treasury teams in the sector. The 8-year and 12-year tranches each offered 75 basis points in coupon step-ups linked to sustainability Key Performance Indicators (KPIs) set over distinct time horizons: the 8-year tranche includes three 25 basis point coupon step-ups linked to KPIs set for 2025, while the 12-year tranche contains two 37.5 basis point step-ups linked with 2030 sustainability KPIs. Investors were particularly impressed by the inclusion of Scope 3 emission reduction targets in the issuer’s sustainability KPIs.

To pre-finance, or not to pre-finance – that is the question

Some treasury teams have either delayed issuing bonds or taken it off the table altogether for reasons that are well known: credit conditions are good for now but risks later this year may disrupt that. On the other hand, many that don’t urgently need funding now face the basic question of balancing the cost of managing liquidity for the next few months against the risk of deteriorating credit conditions.

Managing the cost of future funding has some looking at delayed-draw private placements and pre-hedging

As a result, many corporates are focused on what can be done now to help manage the future cost of funding, including pre-hedging or by using delayed-draw funding instruments. Interestingly, the premium attached to some delayed-draw GBP-denominated private placements priced recently, has been below the implied forward premium visible in the swaps yield curve. This suggests there may be some relative value to gain between the different strategies depending on market pricing at the time of execution.

Activity in the retail and recreation sectors – arguably those most related to activity and reopening of sectors most affected by social distancing – has improved in June in the Euro Area, even overtaking the UK. After a strong jump in May, the UK is stabilising after witnessing a slowdown, likely linked to the Delta variant developments. The US remains stable and better-placed than both the UK and Europe.

Google mobility trends shows further relative improvement in the Euro Area in June

Sources: Google COVID-19 Community Mobility Reports, NatWest Markets

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Corporate Finance
Bank of England

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