This week’s International Treasurer editorial meeting raised a few issues to be explored in the coming weeks. These include opportunistic borrowing in Europe, following the lead of a certain serially successful issuer and a risk-allocation tool to be discussed at a coming peer group meeting.
Opportunistic borrowing
While opportunistic borrowing has slowed down somewhat in the US due to expectations of the Fed’s “taper” happing this fall, it remains robust in Europe, where historically low rates and signs of growth means bigger risk appetites. According to reports, companies in Europe are relying less on bank borrowing and instead issuing Eurobonds. The Financial Times reports that European non-financial corporate issuance rose nearly 20 per cent in the first half of 2013, to $333bn, the highest figure since 2009. The trend of European companies moving away from bank loans to the bond market has also been fueled by Basel III global banking regulations, which force banks to hold more capital against loans, leading to higher rates and less lending.
IBM Leads the way
But while some companies have pulled deals due to the current environment in the US, others have had more luck. Take IBM for instance. According to Bloomberg the info-tech company in July issued $650 million of two-year floating-rate notes yielding 3bps over LIBOR and $1.5 billion of 3.375 percent, fixed-rate securities due 2023 priced to yield 83bps over similar US Treasuries. What is its strategy for choosing a time to issue debt?
Proper portfolio construction?
PIMCO has for a several years touted analysis that showed that the proper underpinnings of portfolio construction is based on risk not asset class. That is, in PIMCO’s view, asset allocation based on risk factors is more optimal than allocation by asset class. The theory is based on a report entitled “The Myth of Diversification: Risk Factors versus Asset Classes” by Sebastien Page and Mark Taborsky. Using the crisis as a backdrop, the authors point to the connection between risky assets and strategies: “Investors are often surprised by how seemingly unrelated risky assets and strategies suddenly become highly correlated with equities during a crisis.”
PIMCO will have a chance to explain its methodology at the NeuGroup’s next Treasury Investment Management Peer Group meeting in the fall. Perhaps then members will get an answer as to whether this new methodology that will replace the Modern Portfolio Theory published by Markowitz over 60 years ago.