Bankers expect a steep drop in corporate fundraising next year after a record borrowing binge in 2020 that helped companies to survive the coronavirus crisis.
Global bond issuance surged by nearly a quarter to $5.35tn in the year to December 22 compared with the same period in 2019. The total easily exceeded the annual record, set last year, of $4.35tn, Refinitiv data show.
But now, analysts at Bank of America predict net new issuance of US investment-grade bonds, one of the hottest markets this year, will drop 76 per cent. A fall of that magnitude would bring the total to $63bn in 2021, the lowest amount since the bank began tracking data in 2002.
“The big flurry of corporations looking to put cash on the balance sheet in March, April and May was striking,” said John Hines, global head of high grade debt capital markets at Wells Fargo. “Clearly the narrative going into next year is that supply will be down.”
The flood of fundraising in 2020 came after central banks bolstered financial markets in response to a crash in asset prices in March. Investors, assured by central bank intervention, flocked back to buy debt, driving borrowing costs lower and lifting prices. The uptick in demand opened up debt markets to even the lowliest rated issuers and those operating in sectors pummeled by the pandemic.
Junk-rated companies, those rated BB+ and lower, raised $547bn up to December 22, a rise of a third compared with the same period in 2019 while top-rated businesses borrowed $4.81tn, 23 per cent more than last year.
Bankers, analysts and investors expect issuance to slow next year as companies focus on pulling earnings back to pre-crisis levels and reducing the amount of existing debt on their balance sheets.
Credit rating agency S&P Global expects issuance worldwide to fall by 3 per cent in 2021 owing to uncertainty surrounding the timeline of Covid-19 vaccine rollouts, post-Brexit uncertainty and a potential renewal of US-China trade tensions.
The improving economic outlook may encourage more companies to grow by making acquisitions next year, funded through selling cheap debt. “Acquisition financing dialogue is more active today than at any point this year,” said Mark Lynagh, co-head of European debt markets at BNP Paribas. “Some corporates are feeling more confident [as] there’s more clarity on what the outlook could look like.”
The recent rollout of the BioNTech/Pfizer vaccine across the UK has given businesses hope for a return to normality in 2021.
Meanwhile, central bank support shows no sign of disappearing yet. The European Central Bank increased the size of its pandemic bond-buying programme this month from €1.35tn to €1.85tn while the US Federal Reserve continues to pump trillions of dollars into financial markets through various schemes.
In turn, investor appetite for corporate bonds remains unsated. Investors have sought out higher returns by lending to riskier companies as interest rates have plummeted and the pool of negative yielding debt has surpassed $18tn for the first time.
Demand has been particularly pronounced for US debt. Even with US corporate bond yields tumbling to record lows across the ratings spectrum, dollar denominated debt still offers higher returns than much of the globe.
“Nearly everyone has efficient access to capital markets, which wasn’t the case at the beginning [of the pandemic],” said Mr Lynagh.