After a heady boom for much of the decade, the huge Eurobond market woke up with a hangover in 1987, and traders say the new year may not turn out much better.
The Eurobond market, so-called because it is based in London and other European financial centers, had become an increasingly popular way for governments and multinational corporations to raise money.
The bonds are floated in a range of currencies, allowing borrowers to take advantage of lower interest rates in some countries. Its effect has been to widely expand the pool of money available since the market cuts across international boundaries.
But the market has been hit by new problems. Investors are less keen to put their money in Eurobonds, while borrowers have found new sources of money, at lower interest rates, elsewhere.
"The number of U.S. corporations who borrowed in the Euromarkets was about one-tenth of what it was in 1986," said Nobuo Funabashi, director of new issue syndication at Nomura Securities International, the largest Eurobond underwriters.
Drop in Volume
In 1987, according to data from Euromoney magazine, the volume of new Eurobond issues fell about 25% after 30% to 40% growth in each of the previous five years.
The short-term problem, say dealers in London, is the dollar, the currency of choice for most Eurobond borrowers. Non-U.S. investors are not willing to take their chances with a currency that has lost more than 20% of its value in a year.
The long-term problem, they add, is that there have been too many firms chasing too little business, underwriting issues that investors do not want to buy.
"Certainly there has been overcapacity in the Eurobond business, said Andrew Large, chief executive of SBCI, the Euromarkets arm of Swiss Bank Corp.
This forced three major firms to withdraw from Eurobonds entirely in 1987. Others cut staff and salaries and withdrew from quoting prices in certain types of bonds.
"I believe the business will go back to a relatively small number of firms," said John Langton, managing director at Gintel and Co. Ltd., a Eurobond broker.
A challenge in 1988 will be to meet the concern of investors who have found that the ability to get in and out of holdings--known as liquidity--has become a problem in the Eurobond market.
John Sanders, chairman and chief executive officer at Orion Royal Bank Ltd., a unit of Royal Bank of Canada, which withdrew from Eurobonds in November, said: "Today's investors tend to be fleet of foot in different currencies. And you can't do that in today's Eurobond markets."
A manager at Daiichi Mutual Life Insurance Co.'s foreign bond investment management division said: "We are very negative on the Eurobond market. In regard to the size of our funds, we cannot help but look for a large-scale market. I think the Euromarket has not yet grown big enough. And without sufficient liquidity, it's hard to achieve investment with mobility."
Other analysts said investors were increasingly turning to the government bond markets of various countries instead of Eurobonds, preferring the safety and liquidity they find there.
Reflecting this, Chemical Bank International Ltd., which axed 20 of 28 Eurobond traders last year, is adding staff to its trading desk in West German government securities, officials there said.
The Organization for Economic Cooperation and Development, in a report issued in November, said the loss of liquidity and investor confidence could threaten the Eurobond market. It said: "There is little ground for an optimistic assessment of the near-term outlook."
The liquidity crisis came to a head after the collapse of world stock markets in October. The weak dollar has frightened investors off, and they are not likely to return until the U.S. currency stabilizes.
In the meantime, any firm that does want to borrow Eurodollars has to pay investors such a substantial interest rate premium that borrowing here becomes prohibitive.
It is cheaper to borrow in the United States, where investors have dollars anyway and do not face currency risks.
In the past few weeks, two of the Eurobond market's most desirable borrowers, Nordic Investment Bank and the Government of New Zealand, tapped the U.S. domestic market, raising several hundred million dollars apiece at rates lower than they could have achieved here.