In an important stress-test, the global capital markets have responded and adapted quickly to the unprecedented shock caused by the novel coronavirus pandemic, which has caused a dramatic shift in the way individuals and organisations in most nations live and work. These extreme conditions are only likely to accelerate the capital market ecosystem’s innovative efforts to streamline the securities issuance process and improve communication between borrowers and investors.
The rapid onset of the coronavirus pandemic had a dramatic impact on market activity, initially leading to selloffs across asset classes as investors sought the relative safety of developed market government bonds and cash. At the height of the market volatility seen in late March, leading equity indexes like the S&P500 and the FTSE250 lost between 30% and 33% in value, while riskier assets like emerging market debt saw more than ten-fold spikes in yields.
The global response to the crisis led by regulators and the capital markets ecosystem was swift and decisive, helping to maintain access to liquidity at a time when it is needed most.
The world’s largest central banks including the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan announced staggeringly large asset purchasing programmes early on; global governments introduced trillions of dollars in fiscal stimulus; and, multilateral agencies and development banks moved quickly to provide credit lines in order to help cash-strapped nations introduce counter-cyclical policy measures to combat the virus.
These measures induced record issuance of investment-grade (IG) bonds once market conditions stabilised, particularly in the US, where IG bond sales set a new first quarter record of USD245bn – a 51% increase year-on-year. At the same time, a rapid rise in demand for funding needed to support higher spending on healthcare and employment has led to record levels of social and sustainability bond issuance. Social bond issuance globally reached USD11.9bn during the first quarter of this year, more than double the previous quarterly record, while sustainability bonds registered an impressive USD13.4bn in new supply, according to data from Moody’s and Bloomberg.
“Public markets have proven their resilience during the pandemic – their ability to help mobilise capital rapidly has been remarkable. Between March and May, we saw over USD13bn of equity and over USD340bn of debt raised on our markets in London and Milan. The ecosystem has stepped up – across the regulatory community and market infrastructures,” says Shrey Kohli, Director, Head of Debt Capital Markets and Funds, Capital Markets at London Stock Exchange.
London Stock Exchange was among the first of its peers to act. It worked closely with UK regulators including the Financial Reporting Council (FRC), the Financial Conduct Authority (FCA), and the Prudential Regulatory Authority (PRA) to implement a series of temporary measures to ease strains on listed companies, including allow firms to delay preliminary financial reporting and revising reporting requirements around working capital during the coronavirus pandemic in order to give them more time to develop and model the financial impact of the crisis on their balance sheets.
Leveraging London’s position as the global hub of sustainable finance, the exchange has supported a range of social and sustainable bond issuers coming to market as they sought to mitigate the impact of the pandemic, including the African Development Bank (AfDB), which placed a USD3bn Fight COVID-19 social bond, the largest social bond to date and issued on London’s Sustainable Bond Market in April, and the International Finance Corporation ‘s (IFC), which placed a USD1bn social bond – its largest ever – to support emerging markets. It led the market in April by introducing an admission fee waiver for any social or sustainability bonds on the Sustainable Bond Market whose proceeds mitigate the impact of COVID-19.
“We wanted to increase the awareness of social bonds as a useful funding tool, particularly when the use of proceeds were directed towards COVID-19 related-healthcare and medical research, equipment, and projects that address the unemployment generated by the crisis. The market has responded - a wide range of COVID-19 response bonds have raised over EUR60bn since March, with significant issuances through London Stock Exchange’s Sustainable Bond Market.”
An Accelerated Shift Towards Digital and Automation
With much of the world still locked down and employees working from home indefinitely, issuers and investors have rapidly pivoted towards a slew of digital platforms to help them do their day-to-day work and, increasingly, raise and deploy capital, with bond and equity roadshows now taking place almost exclusively over video or conference calls.
Kohli says the pivot to digital is only going to accelerate, partly due to practical considerations and changing habits.
“A big part of the effort going forward will involve helping issuers and investors adapt to new circumstances and technologies when it comes to doing business, engaging with one another, and raising capital,” Kohli says.
London Stock Exchange has developed platforms like Spark Live, part of its Issuer Services offering, which provides issuers with a platform to directly engage investors through digital events, host capital markets days and share important company information. Recently, the International Capital Markets Association (ICMA) hosted the Green & Social Bond Principles AGM on Spark Live, bringing together speakers from Asia, Europe and the Americas with over 400 delegates from across the globe.
It has also partnered with fintech company PrimaryBid, a platform which enables retail investors to access capital raisings on the same terms as institutional investors. The platform has been deployed in multiple placings of late, including by FTSE 100 companies Compass Group and Ocado.
But the pandemic has also prompted financial services infrastructure providers to extend their efforts in using digital platforms and novel technologies to make global bond markets – often seen as arcane and heterogeneous, and requiring significant back-office resources and time – more agile and secure.
To this end, LSEG is developing a platform called Flow as part of its Issuer Services offering, which is an end-to-end automation tool built to simplify bond transaction execution by linking issuers, dealers, legal advisers and other stakeholders in one place as they originate, negotiate and close MTN deals.
LSEG’s participation in the General-purpose Legal Mark-up Language (GLML) Consortium – alongside legal firms such as A&O, Linklaters and Clifford Chance, investment banks, paying agents and tech firms such as Nivaura, a fintech company focused on primary market digitisation and whose technology helps power Flow – is an important aspect of this. GLML is a machine-readable open source language that can be easily understood by people and applied to almost any financial product, and is one of the key components of Flow. It can help facilitate a high degree of automation across a range of documentation-heavy processes.
“There will be a bigger focus on digital technology and automation to make issuer-investor communication, information dissemination, and the issuance process easier and more cost-effective. Our initiatives attempt to help market participants to do so in an open-access, resilient, secure and scalable manner,” Kohli says. “Ultimately, markets are about ecosystems of trust and transparency between investors and issuers – as an operator of exchanges for over 200 years, we certainly feel we can help drive efficiency and innovation forward while improving trust and transparency.”