Bankers and investors are bracing for a bumper month of debt issuance in the US, with pent-up supply from a quiet end to August set to be unleashed following the Labour day holiday this weekend.
September is always a busy month for corporate bond sales after the unofficial summer break. But participants say some parts of the market could rival the frenetic pace of new deals in the depths of last year’s pandemic shock, when companies grasped for cash to survive.
Adding to the urgency, some borrowers sense that high inflation and a broad economic recovery evident in their own businesses could wash through to higher borrowing costs by the end of the year.
“The engine of supply is running on all cylinders,” said Jeanmarie Genirs, Deutsche Bank’s head of syndicate for US investment-grade deals. “While the market is engaged we are telling people, ‘please, if you are ready to go, now is the time’.”
Bank of America credit strategist Oleg Melentyev predicts $47bn of new high-yield corporate bonds — the spicier end of the risk spectrum offering investors higher returns — will hit the market in September. That would roughly equal the runaway pace of issuance during the pandemic in the same month last year, according to Refinitiv data.
Alex Barth, who runs US leveraged debt capital markets at Deutsche Bank, said it could be even more, with junk bond and leveraged loan issuance potentially pushing up to $60bn — a level breached for the first time in January of this year and surpassed again in March.
Higher up the ratings ladder the story is much the same, with Genirs forecasting $140bn of new debt. That number falls short of the $200bn raised in September last year, or the $308bn record borrowed in April 2020, but would still maintain a frenetic pace of issuance over the past 18 months, lurching back from $90bn issued this August, according to Refinitiv.
Unlike 2020, when companies rushed to secure capital to outlast the pandemic downturn, this year has seen more opportunistic fundraising, with companies looking to lock in low borrowing costs over a longer time horizon, or borrow to fund acquisitions and stock buybacks, rewarding shareholders.
The window of opportunity to lock in historically low borrowing costs may be starting to close. Fears of runaway inflation earlier this year hit US government bond prices, pushing up their yields — a crucial input into corporate bond interest rates. Since then, investors have largely come around to the Federal Reserve’s mantra that inflationary pressure will be transitory.
Treasury yields have declined, with corporate bond yields falling alongside them. The average yield across investment grade corporate bonds has dropped to 2 per cent, down from a peak of more than 2.3 per cent in March but still higher than the 1.8 per cent reached at the very start of the year, according to an index run by Ice Data Services.
“We had a little spook on the rates side,” said Barbara Mariniello, who runs US bond issuance at Barclays. She predicts $135bn of investment grade issuance in September, and adds that a lot of her corporate clients remain worried about inflation, with anecdotal signals from companies’ own supply chain pressures potentially front-running evidence of price rises in official data sources.
“If companies are seeing that, even if it hasn’t hit official data yet, then they are aware that funding costs could go higher again,” said Mariniello. “In some cases they are accelerating their fundraising.”
Global investors have proven to be more than happy to absorb these corporate fundraisings, as they struggle to generate returns from even lower yields in government bonds across the world.
According to Bank of America’s analysts, financial debt — bonds and other debt securities, as well as loans — of non-financial US firms has grown 30 fold in the past 50 years to $11.2tn. As yields have steadily declined in recent decades, the share of that debt owned by foreign investors has grown, accelerating after the 2008 financial crisis.
BofA’s analysts, drawing from data from the Federal Reserve, estimate foreigners own roughly 27 per cent of all US corporate bonds, making them the largest single investor base in the market.
Even though US corporate bond markets are offering close to record low returns for investors, their returns remain markedly higher than what is on offer elsewhere, with the total amount of negative yielding debt around the world rising higher this quarter, maintaining a long run trend that began with the monetary policy responses to the 2008 financial crisis.
“As an investor it is a super frustrating market,” said Monica Erickson, head of investment grade credit at fund manager DoubleLine. “There is nothing that looks interesting on an absolute level of return. But on a relative basis, the US is still attractive. It’s still significant for foreign investors to come in and there is still a lot of money to put to work.”
However, some worry that rampant demand is fuelling a decline in lending standards, allowing increasingly risky companies to gain access to easy credit.
BofA’s analysts note that this has been somewhat offset by the roaring rally in equity markets, increasing the cushion that sits beneath debt investors should company fortunes take a downward turn.
“It means equity investors feel more comfortable adding more debt,” said Erickson. “But debt investors, all else being equal, tend to like companies being more restrained.”