Treasury teams are finding keen buyers of their corporate debt amongst defined benefit (DB) pension funds. The UK’s £1.4trn DB pension fund sector, which offers beneficiaries a guaranteed income for life, has benefited from higher interest rates which have meant many of these schemes are now fully funded. They want to lock in the benefits by buying government and corporate debt in preparation for derisking and entering the bulk purchase annuity (BPA) market. It’s leading to good demand for long-dated sterling issuance, explains Michael Booth, Portfolio Manager, Invesco.
“We’ve seen a fair bit of interest in long-dated sterling issuance tied to demand from defined benefit pension funds derisking. We are seeing treasury come in and take advantage of that. The ECB is running off its corporate bond buying programme and institutional money is filling demand. It’s testimony to these yields being attractive,” says Booth.
Treasury teams may question the rationale of extending maturities in line with stronger demand for seven-12-year paper over five-seven year paper when interest rates are still high because they risk locking in a higher cost of borrowing. However, Giulio Baratta, Head of Investment Grade Finance, Debt Capital Markets at BNP Paribas argues that the cost between issuing a ten-year bond over seven-year is marginal and corporates could benefit from investor demand for longer-dated issuance.
“The Sterling market is buoyant for the longer end (12-15 -20 year) where we have seen reverse enquiries from investors. Of course, corporate treasurers are loath to extend maturities when rates are still high. But we would argue that the marginal cost of issuing ten-year rather than seven-year paper is limited.”
Some European corporates are also tapping into demand from UK institutional investors by issuing in sterling, evident in a spike in European corporate bond sales denominated in sterling compared to 2023 levels with names including French luxury goods group Kering, and German truck manufacturer Traton both recently coming to market.
Treasurers time bond issuance by looking at value, especially market arbitrage opportunities around credit spreads and the all-in cost of financing on a currency hedge or a market hedge basis, explains Booth. European businesses might find it cheaper to issue in sterling than euros after hedging back to euros, for example. Treasury teams also look at natural hedging to offset assets in other geographies.
Derisking demand
Corporate bonds are attractive to insurers considering buyout opportunities because they can use them as a match for their liabilities under solvency rules. They are also more liquid than other investments and can provide a higher yield than gilts.
Demand for corporate issuance from pension funds is set to continue through the year, writes Jenny Neale, Senior Pensions Consultant at Willis Towers Watson, sharing her predictions on what to expect from the de-risking market ahead.
“2023 was a record-breaking year with over £50bn of bulk annuities written. This demand from the market is expected to only increase, with many schemes having changed their investment strategy to try to lock in favourable funding positions and having spent much of 2023 preparing data and benefits for going to market in the coming months.”
She argues that given the step change in funding position for many pension funds, 2024 has the potential to be the busiest year ever in the de-risking market.
