Fears of a global trade war caused bond issuance to seize up in April, with investors reluctant to take on further risk. A return to calmer conditions in May has prompted many corporates to pounce on the refinancing opportunity.
Debt markets have reopened with a vengeance, with companies racing to refinance before conditions potentially worsen again. According to Bloomberg, European bond issuance surged past €1 trillion by 20 May – the fastest pace on record.
‘You don’t want to be in a hurry when refinancing’
Issuers from Siemens to Novo Nordisk helped drive the surge, rushing to lock in terms after markets reopened in late April. The premium paid by companies over government bonds, bloated during April’s trade tensions, has since narrowed again.
Yet this refinancing surge comes at a time when economists continue to forecast more rate cuts from the European Central Bank (ECB), presenting finance directors with a strategic dilemma. Should they take advantage of the current issuance window, or wait in the hope of securing cheaper funding later in the year?
Constant process
This is not a one-off tactical decision, stresses Till Karrer, head of debt advisory at KPMG Germany. ‘Our clients often don’t have one maturity for all their financing instruments,’ he explains. ‘It’s a constant process.’ And based on data from S&P Global Ratings, refinancing needs over coming years are significant, with about $2.5 trillion of bonds maturing for non-financial companies over the coming five years. ‘We advise refinancing up to two years prior to maturity,’ he adds. ‘You don’t want to be in a hurry.’
That said, companies can adjust the pace of refinancing, as CFOs seek the best terms. So how should they frame the dilemma of whether to frontload refinancing or hold back more in the hope of lower rates?
First, while trade tensions have cooled in recent weeks, flare-ups are not out of the question, with the potential to once again make investors less willing to lend to companies. ‘President Trump’s 90-day pause on most tariffs has not eliminated the uncertainty,’ points out a recent paper from S&P. In May the US Court of International Trade ruled that Trump did not have the authority to use the emergency economic powers legislation that he cited when imposing sweeping global tariffs the previous month. The administration moved quickly to appeal against the ruling, threatening to go to the Supreme Court if necessary to try and overturn the decision.
‘Capital market sentiment can shift overnight’
Investors have also become increasing anxious over the rise in US government debt. Rising yields on even the safest government debt also typically lifts the cost of borrowing for governments. ‘Uncertainty is the riskiest thing for capital market products,’ Karrer says. ‘You cannot really anticipate the sentiment, because it can shift overnight.’
Waiting game?
That said, CFOs seeking the best possible terms, may also be tempted to shift some issuance toward the later part of this year in the expectation that the ECB – which has already lowered borrowing costs seven times in the past year – will continue to cut rates. The ECB’s most recent survey of professional forecasters reveals that the central bank’s deposit facility rate, currently at 2.25%, is expected to fall to 1.75% by the end of 2025.
Along with the spread – the premium companies pay over government bonds – ECB rates remain a key component of borrowing costs, particularly for floating-rate debt. Central bank policy also shapes the cost of bank loans, meaning expectations of further cuts could lower borrowing costs across funding sources.
‘Trying to pinpoint the ECB rate low is an unwise strategy’
Yet most advisers caution against making timing the centrepiece of any refinancing plan. ‘Trying to pinpoint the low point in ECB rates would be a very unwise strategy,’ Karrer says. He advises companies to prepare a range of options instead, with refinancing beginning well ahead of maturities.
Diversify, diversify, diversify
One strategy that gives CFOs optimal flexibility involves securing bank loans now, then replacing them with bond market issuance when conditions allow. ‘You get the security of having financing in place, while keeping the option to take advantage of good bond market conditions,’ Karrer explains.
‘Diversify parties, instruments and maturity dates’
He says this is part of a broader approach. ‘Our main advice is: diversify in any aspect. Diversify financing parties, diversify financing instruments, diversify the maturity dates.’ Relying on a single lender, or a single window in the bond market, can leave companies vulnerable to sentiment shifts. Diversification extends to revolving credit facilities, bilateral bank loans, asset-based lending, private placements and even factoring (where companies sell invoices at a discount to unlock cashflow ahead of collection).
Public debt markets are not for all businesses. ‘For privately held companies, accessing public debt markets can be especially challenging, due not only to reporting obligations and credit rating requirements, but also the reputational risk of pulling a deal if sentiment shifts,’ Karrer explains.
The goal, he says, is to ensure clients can access capital whatever the weather. ‘There isn’t one solution that works for everyone. But there is a process that can help prepare for different market outcomes.’
