Firms raised more than $ 100 billion in the bond market in the first week of this year, as CFOs launched an effort to lock in low borrowing costs before interest rates rose. benchmark does start to climb.
Global corporate bond issuance reached $ 101 billion in the year to Jan. 7, with U.S. transactions hitting an all-time high. Global transportation trailed just a $ 118 billion blockbuster through 2021, which was Refinitiv’s highest record in 19 years.
The corporate bond market generally picks up at the start of the year after a period of drowsiness around the end of December holidays. But the rush for the new deals offers a first glimpse of the emissions barrage expected early this year, as companies seek to exploit debt markets before major central banks start raising interest rates. in the short term, which increases the cost of borrowing throughout the economy.
“It was obviously very active from the start,” said Dan Mead, manager of the quality investment syndicate at Bank of America. “Our issuers expect rates to likely continue to rise from here. They will try to take advantage of the market now as long as there are favorable conditions to lock in those rates. “
Transactions have been dominated by banks and other financial issuers, especially foreign institutions raising funds in US markets. A host of big names such as insurer MetLife and heavy-duty equipment maker Caterpillar also sold new bonds.
Highlighting easy access to finance for U.S. businesses, cruise line Royal Caribbean launched one of the first deals in the lower-rated junk bond market, with a $ 1 billion issue last Tuesday.
Even the pandemic-stricken movie chain and business community darling Reddit, AMC Entertainment, has said it intends to test investor appetites for risky debt. In a tweetChief Executive Officer Adam Aron said he hoped to refinance the costly debt assumed over the past two years, pushing back deadlines and easing terms.
The breakneck pace continued on Monday, with a spate of new debt slated ahead of what is expected to be a slightly slower period in the corporate earnings season that unofficially begins on Friday.
However, bankers and analysts said difficult market conditions in early 2022 could hurt issuers’ plans. Debt and equity markets have experienced a period of volatility since last Wednesday, when the Federal Reserve firmed up signals that interest rates could rise earlier and faster than investors generally expected. The tech-rich Nasdaq Composite slipped about 8% from its November high, as U.S. government bond yields soared.
These measures contributed to a mixed start to new equity issuance, which fell to just over $ 7 billion in the first week of 2022, from $ 22 billion north of the same period of the year. former. Sales of additional shares of already listed companies have dominated, and even that new business has been cut by more than half from 2021. Nonetheless, the overall issuance remains high by historical standards, with 2021 being an anomaly. in the early days traditionally slower for the issuance of shares following a new year.
The effect of the turbulent markets was also noticeable in the debt markets. Investors pulled a few orders for new bond trades last Wednesday, the day the Fed released the minutes of its December meeting, bankers said.
“It’s a solid start to the year, but it indicates a funding environment that will be a bit more difficult to navigate than what we saw in 2021,” said Jonny Fine, head of investment grade debt issues at Goldman Sachs.
The higher surge in Treasury yields translates into higher borrowing costs for companies, weighing on the value of existing bonds that offer investors a lower interest rate. At the same time, it has encouraged companies to enter the market quickly before borrowing costs rise.
Already this year, the average yield on quality bonds has fallen from 2.36% to 2.55%, according to an index managed by Ice Data Services.
In US stock markets, it was biotech companies – considered less sensitive to the market in general – that led the few public listings to start trading. But the volatility resulting from the reassessment of monetary policy was still evident as Vigil Neuroscience slipped from its list price of $ 14 to $ 11.41 and Amylyx Pharmaceuticals fell from $ 21 to $ 16.72.
The lukewarm response to new US listings could be tested again this week, with private equity group TPG and HR software firm Justworks potentially starting to trade, as investors grapple with heightened attention to capital markets which is now tuned to the perceived changes in the Fed. thinking.
“A lot of clients are very focused on the macroeconomic situation and what could happen to inflation rather than the fundamentals of the companies,” said Brad Elliott, credit strategist at Barclays. “The focus has pretty much shifted to what the Fed is going to do.”