U.K. Companies Stampede Into Bond Market in Pre-Brexit Lull

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U.K. companies are rushing into Europe’s bond market, taking advantage of what may be a last chance to lock in low-cost financing before renewed Brexit upheavals.

Last week was the busiest for sales in five years, according to data compiled by Bloomberg, and Royal Mail Plc, WM Morrison Supermarkets Plc and Lloyds Bank Corporate Markets are all working on potential offerings. Borrowers last week included Barclays Plc, GlaxoSmithKline Plc and broadcaster ITV Plc.

U.K. issuers may have a potentially short window to get deals done, as earnings blackouts and the countdown to the country’s Oct. 31 departure from the European Union may hinder deals next month, particularly if a no-deal Brexit seems likely. In the meantime, optimism that the country will reach an agreement or delay its departure is boosting the pound and helping to hold borrowing costs near record lows in both euros and sterling.

“The whole Brexit situation remains in a state of flux,” said Andrey Kuznetsov, senior credit portfolio manager at Hermes Fund Managers Ltd. “In this type of situation, it is normal for issuers to tap the market in periods of calm and improved sentiment.”

Gains for the pound this month will also likely boost investor demand for sterling assets especially amid Europe’s low yields, he said. U.K. companies sold 7.6 billion euros ($8.3 billion) of bonds in euros and sterling last week, according to data compiled by Bloomberg.

Barclays demonstrated the recent pricing advantage for issuers, as the bank sold a 1 billion-pound ($1.2 billion) AT1 at 6.375% last week after more than 7.5 billion pounds of orders. That compares with 7.125% for a comparable note in June.

Sterling borrowing costs are about 2.1%, compared with above 3% at the start of the year, according to Bloomberg Barclays index data. Euro investment-grade yields are below 0.5%, the data show.

Royal Mail, the nation’s postal service, will start a roadshow on Sept. 25 ahead of a bond sale in either pounds or euros.

“We are taking the opportunity to access finance at the current low rates,” a spokesperson for the London-based company said in an emailed reply to Bloomberg News questions.

Still, Metro Bank Plc postponed a pound bond sale on Monday, citing “market conditions”. The lender’s shares have tumbled more than 80% this year after regulators discovered issues with the way it classified loans.

Yields Creep Up

Yields in both euros and sterling have crept up this month, after fairly consistent declines this year, adding extra urgency for any borrower considering a sale. Europe’s traditionally busy September sales surpassed 100 billion euros at a record pace this year.

Brexit risks also remain for borrowers and issuers. Uncertainty about the country’s future ties to the EU contributed to the collapse of tour operator Thomas Cook Group Plc. U.K. non-financial companies have also only sold about $60 billion pounds of bonds worldwide this year, the lowest tally since 2016, according to Bloomberg data. Domestic sterling sales are the lowest since 2015, the data show.

Domestic-focused companies have taken advantage of pauses in Brexit upheavals to get deals done this year. Retailers Next Plc, Tesco Plc and Co-Operative Group Ltd. all sold pound bonds in a three-week spell ending in May. Marks & Spencer Group Plc followed in early July.

Morrison, the country’s fourth-largest supermarket chain, plans to offer a sterling-denominated benchmark twelve-year bond following meetings in London on Monday. The company didn’t reply to an e-mailed request for comment on the bond sale.

Across Europe, “it makes sense for companies to take advantage of the current window to issue bonds, said Ryan Staszewski, senior portfolio manager, investment grade credit at Columbia Threadneedle Investments.

(Updates with Metro Bank postponing bond sale in 10th paragraph)

–With assistance from Alice Gledhill.

To contact the reporter on this story: Priscila Azevedo Rocha in London at pazevedoroch@bloomberg.net

To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, Neil Denslow, V. Ramakrishnan

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