Corporate bond issuance set for slowdown after record surge in H1 as default rate starts to spike
Corporate bond issuance may soon max out after hitting new highs in the first half of 2020, according to fixed income specialist BlueBay Asset Management in a recent market outlook note.
Net issuance of corporate debt surged globally as central banks including the Federal Reserve and Bank of England announced in March that they would begin purchasing corporate bonds, flooding the market with liquidity. In turn, companies hurt by pandemic-related lockdowns issued more debt to stay afloat.
The outstanding supply of US investment-grade corporate bonds increased by approximately 10 per cent between 1 March and 26 June, according to the latest figures from MSCI.
“This surge in issuance may partly reflect the needs of companies to fund existing operations while facing revenue shortfalls. It may also reflect the desire of corporate treasurers to take advantage of historically low rates,” says MSCI.
Mark Dowding, CIO at BlueBay, says this will soon reach its peak: “We believe that corporate bond supply in the second half of this year will be much lower than it was in H1, at a rate closer to what was seen in the second half of 2019.”
There are signs that issuance is already slowing. CUSiP Global Services (CGS), which tracks the issuance of new security identifiers as an early indicator of debt and capital markets activity over the next quarter, has reported that May’s monthly volume of requests focusing on US corporate debt fell by 43.4 per cent.
“We may be seeing early signs of a slowdown in corporate debt issuance,” said Gerard Faulkner, director of Operations for CGS, in June. Nevertheless, on a year-over-year basis, corporate CUSIP requests were still up 23.8 per cent.
Dowding says that asset prices should stay stable thanks to “supportive” central bank policies.
“Central bank balance sheets are set to grow in the second half of 2020 in line with prior policy announcements,” he notes. “Consequently, we believe that the supply/demand balance should materially favour those assets which central banks are buying versus those which they are not – when viewed on a market beta-adjusted basis. As such, we retain a long risk bias in investment-grade assets, whilst expressing a more cautious view elsewhere.” Prices may rise if the return of economic optimism mixes with an “abundance of liquidity”.
With the corporate debt burden increasing as global economies weaken, this may be a warning signal to credit investors. MSCI has noted the rising numbers of ‘fallen angel’ companies, as well as the prevalence of corporate borrowers with poorly performing stock prices among the surging bond supply.
As Danish investment bank Saxo Bank noted in a recent third quarter outlook: “Q2 has already seen record numbers of corporate defaults, an issue that is far tougher for the Fed to address. It may be able to buy a corporate bond – or USD750 billion’s worth – but it can’t prevent the underlying company from declaring bankruptcy to restructure its debt.”
SaxoBank expects that in the face of widening insolvencies and defaults, the “US dollar must roll over eventually”: “If nothing else, because we live in a world drowning in USD-denominated debt, both onshore in the US and globally – and any durable recovery has to see a devaluation of the US dollar in real terms in the US and in relative as well as real terms (think exchange rates) in the rest of the world.”
BlueBay’s Dowding concedes there may be a need for “further policy support” if there are setbacks to vaccine development and economic recovery. Even with this, it “may prove difficult to stop corporate and sovereign defaults from accelerating and for fear to remain the dominant investment theme”.