Record US Corporate Bond Issuance Defies Gloom - Dealogic
(28 May 2020 – United States) US corporates issued a record US$1.2 trillion worth of bonds this year according to Dealogic, marking a 78 percent increase year-on-year. The more than US$1 trillion worth of investment-grade corporate debt sales brought to market in the first five months of 2020 compares starkly to 2019 when the same figure wasn’t reached until after 11 months.
The reason for the change from traditional debt market trends is record central bank stimulus. Reserve banks are heavily intervening in the market, which was already transformed by the presence of passive index trackers. The torrent of new debt creates a new set of risks however. US companies were already carrying high debt ratios into the crisis. The US Federal Reserve will have to decide when and how to remove the support without forcing corporate borrowers into distress.
Usually bond market liquidity dries up at the outset of a financial crisis before recovering during the full brunt of the economic downturn, for example issuance contracted by 20 percent at the start of the Global Financial Crisis (GFC) in 2008. As of 2020 during the coronavirus pandemic, the decline in corporate bond issuance only lasted a matter of weeks.
It must be noted that while debt market players nervously awaited more clarity from Washington on the scope of its aid in March, the benchmark that tracked the most creditworthy part of the US$9 trillion US corporate bond market, the ICE Bank of America US IG Corporate index, was having its worst month on record. In the near US$1.5 trillion high-yield sector, 32.6 percent of its outstanding bonds were trading at distressed levels in March according to Fidson, implying an 8.6 percent default rate over the next 12 months. The recovery from those lows has been nothing short of remarkable.
Even corporates such as Boeing in particularly prone sectors such as the aviation industry, coming to grips with supressed revenue and customer demand for the foreseeable future, have found strong bids for their debt. Interestingly issuance of junk bonds is accelerating also.
For H2 2020 debt capital market strategists expect a slowdown in corporate borrowing, especially if the economy rebounds quickly. Corporates are even expected to borrow as little as US$200 billion in H2 2020 according to Bank of America strategist Hans Mikkelsen.
“Leverage is going higher as cash flows are declining. Depending on how the recovery takes shape, this may weigh on credit quality and ratings. If it’s steep and long drawn out, that will be something to be mindful of” said T. Rowe Price Debt Portfolio Manager, Steven Boothe.