Indices of high-yield bonds and speculative-grade loans are showing growing investor confidence. While corporate defaults rose modestly in 2023, there is a general sense that many investment portfolios are in a good place.
Goldman Sachs’ head of global credit and acquisition finance, Christina Minnis, has referred to a rebirth in demand for riskier company debt as the cost of capital reverts to more acceptable levels.
The evidence backs this up. Janus Henderson Investor’s latest credit-risk monitor report states that US companies are finding it easier to refinance in capital markets as declining inflation and expectations of rate cuts allow yields to come down, despite bank lending standards remaining tight by historic standards.
January issuance was dominated by the automotive, utility and real-estate sectors, with a good mix of senior and hybrid bonds. On the back of lower issuance yields, it is particularly noteworthy that the real-estate market has become more active again, suggests Douwe van Duijvendijk, head of northern Europe corporate debt capital markets at ING.
“It is not that we necessarily expect the second half of the year to be materially worse, but geopolitical risks remain elevated. The key lessons learned from 2022 and 2023 are that it is a prudent strategy to not miss out on favourable issuance windows,” he says. “Moreover, the US elections could trigger heightened geopolitical concerns.”
Positive reception
Primary issuance has been positively received since the start of the year with well-subscribed order books, large revisions from initial price thoughts through to final levels, and relatively minimal new issue premiums, according to Andrew Menzies, global head of DCM at Societe Generale.
He notes that the shape of the rate curve remains inverted, which means any excess proceeds can be placed on deposit with reasonably healthy rates, thus minimising carry.
“We are forecasting total yearly corporate investment-grade volumes of €330 billion for 2024 versus €292 billion last year,” he says. “From a sector perspective, the year opened as anticipated. Automotive made up 38% of January euro investment-grade supply, while utilities accounted for 30%, although we anticipate that the make-up will diversify as we come out of the earnings season.”
More challenging sectors – such as real-estate investment trusts – have also succeeded in coming to market with three big issuances (Logicor, CTP and P3 Group) underlining the current favourable market conditions.
“Traditionally, February is relatively quiet due to blackout periods and results publications,” says Xavier Beurtheret, head of DCM corporates at Crédit Agricole CIB. “Having said that, we should expect – everything being equal – a strong level of activity in March and the second quarter of the year.”
He refers to several factors in addition to elections that could push some corporates to prefund before the summer break, including persistent high volatility implied by uncertainties over the Russia-Ukraine and Middle East conflicts, as well as trade tensions that could worsen the credit environment.
“The element of corporates’ funding costs which is somewhat in their control is credit spreads, and they are aware of just how historically attractive these spreads are now,” says Matt Thomas, Barclays’ head of corporate debt capital markets EMEA. “Most corporate teams do not expect longer-term rates to fall dramatically even if central banks start cutting policy rates.”
Front loading
As clients seek de-risking measures ahead of the US elections, Keval Shah, head of bond syndicate at Lloyds Bank capital markets also expects the majority of activity to be front loaded to the first half of the year.
“Refinancing at this stage is a prudent strategy,” he says. “While interest rates may fall, the expectation is that we will not be returning to the low-rate era we saw after the global financial crisis due to central bank quantitative easing. Equally, given rising geopolitical tensions and major upcoming elections, there is potential for heightened volatility in the future, possibly resulting in periods of restricted market access.”
Van Duijvendijk at ING reckons the current market might be pricing in too many rate cuts, limiting the up-side potential of waiting for even lower interest rates.
“There is even a scenario where a marginal increase in economic activity later in the year could lead to upward pressure on rates again,” he says.
Refinancing at this stage is a prudent strategy. While interest rates may fall, the expectation is that we will not be returning to the low-rate era we saw after the global financial crisis
Keval Shah, Lloyds Bank Capital Markets
From an Asian perspective, Clifford Lee, global head of fixed income at DBS Bank expects corporate refinancing activity in the Asia ex-Japan G3 bond market to pick up this year because of pent-up issuance from previous years due to interest rate hikes and optimistic market sentiment.
“We are seeing more client engagement on issuance proposals and expect activity to pick up in the second quarter as more companies emerge from blackout periods and when rate cuts materialise in the later part of the year,” he says.
Given the pent-up refinancing needs in Asian G3 markets, Lee suggests that regional corporates pace themselves to take advantage of optimal market conditions and to capture potential lower base rates in the later part of the year.
