Credit Trends: Global Financing Conditions: First-Quarter Issuance Surge Will Taper Off Amid Increasing Risks

Mad Dash Rather Than A Gold Rush

Relative market optimism–predominantly in developed markets–fueled by expectations for rate cuts by central banks this year, combined with declining inflation and the hopeful realization of a “soft landing,” pushed bond spreads to multiyear lows (see chart 2). With spreads so tight, many issuers came to primary markets in the first quarter, pushing issuance growth up across nearly all major asset classes.

In the U.S., the speculative-grade bond spread tightened to a record low of 234 basis points (bps) as of April 10–mostly the result of Treasury yields rising faster than corporate yields recently. Although still slightly elevated compared with the start of 2022, European speculative-grade bond spreads have also fallen considerably in recent months.

Many issuers took advantage of favorable conditions to refinance. 
Far from a surge in growth-oriented ends such as mergers and acquisitions (M&A) or capital expenditure, refinancing dominated issuer-led activity in the first quarter. This was particularly true for the speculative-grade corporate issuers (see chart 3).

A record 77% of all speculative-grade debt issued in the first quarter was for refinancing. This was also one of the largest quarterly totals, with $469 billion in total speculative-grade debt issued. Investment-grade borrowers displayed similar–though less dramatic–trends, particularly in the U.S.

Now, hopes for significant rate cuts have all but disappeared (see chart 4). 
Recent economic data in the U.S.–from job openings to inflation–has all but put an end to the once very optimistic view among markets that the Federal Reserve would cut six times this year.

Interest-rate cut expectations have changed quickly, particularly since mid-March. Concerns about the sharp increase in Treasury supply have also resurfaced, arguably pushing longer-term yields higher. The possible consequences for the rest of the world are either that other major central banks will have to keep rates elevated if keeping pace with the Fed, or that cuts–with 75 bps worth still in our base case for the European Central Bank (ECB) this year–will result in even more appreciation in the U.S. dollar. All things being equal, either case would suppress our U.S. dollar-based issuance totals moving forward.

Expected policy rate cuts may have already been priced into longer-term corporate interest rates, which could dampen issuance growth (see chart 5). 
While floating-rate benchmarks have always tended to move with policy rates, longer-dated yields sometimes behave differently. Corporate yields have fallen in recent months, well ahead of actual cuts by central banks.

Given higher federal funds rate expectations recently, any pass-through to longer-dated maturities may have already occurred and even need to be pulled back. Indeed, corporate yields have been rising recently, despite the current belief that policy rates will decline later this year.

We expect issuance will prove to have been front-loaded this year, given we assume risk aversion will increase as 2024 progresses. 
The timing and extent of interest-rate cuts, the lead-up and results of roughly 70 elections globally, and the heightened potential for increased geopolitical events could all raise volatility.

Recent circumstances in the Middle East, for example, aren’t incorporated into our projections–such instances do not on their own tend to have dramatic impact or lead to extended negativity for primary bond markets. However, this year is arguably vulnerable to multiple events or a confluence of events that could stress risk perceptions more than usual.

Issuance Projections

We expect nonfinancial issuance to increase 10% in 2024. 
This is up from our prior forecast for 5.5% growth. Most of the full-year increase may be behind us already, with first-quarter totals up roughly 21%, as recent market sentiment has turned more negative with uncertainty growing in the second half of the year.

The sizable upcoming maturity wall, particularly for rated maturities through 2026 ($3.8 trillion globally), should support issuance. This also largely holds true for overall issuance (including unrated debt), with almost $3.9 trillion in face value due in 2025 and 2026.

Falling cash balances should also support issuance, particularly among investment-grade entities. Companies had built up large stores of cash and investments from excess issuance in 2020, but we expect their cash and liquid holdings to return to pre-pandemic levels this year and even lower next year, taking away an alternative source to pay down upcoming principal payments or fund future growth.

M&A could grow this year as well, after two years of suppressed demand and lower-than-typical volumes. But recent developments supporting persistently higher interest rates alongside unfavorable valuations could limit growth. Another potential obstacle could be more restrictive regulations ahead, particularly in the U.S. So far, announced M&A volume has been consistent over the last 12 months, but still weaker than prior to the pandemic on a monthly basis (see chart 6).

Issuance growth from China has declined in recent years but could provide an upside surprise if authorities attempt to stimulate the economy. For now, we feel this is outside our base case. Much of China’s issuance growth in recent years has come from the still highly leveraged real estate sector, where issuance is down slightly from a year ago. For now, we expect general debt growth in China to be roughly in line with nominal GDP growth this year.

We expect financial services issuance globally to grow about 8% in 2024, with upside potential, even if issuance slows in the second half. 
This is consistent with our expectations for other sectors. Despite growth rates in excess of 20% for many sectors in the first quarter, financial services was up a more modest 15.5%.

Issuance growth in the sector was powered by an 89% jump in the U.S. as issuance normalized. Global systemically important banks had cut back after the bank sector stress in first-quarter 2023. If these banks return to their normal issuance trends, that alone could add a couple of percentage points to issuance growth this year.

The refinancing pipeline for rated financial services companies appears robust through 2028 ($4.5 trillion globally). Increases in near-term maturities are partially the result of higher issuance of shorter-term instruments recently (see chart 7). Use of shorter tenors fell considerably after the financial crisis, but has been rising since the onset of the pandemic, reaching 15% of all global financial services issuance last year. This could help stabilize issuance trends for this sector, particularly while rates are higher, making shorter maturities less costly relative to longer-term debt.

M&A activity could also increase in the U.S. bank sector as a result of new Basel III capitalization rules being implemented, particularly for those banks with around $100 billion in assets. Most observers believe that many midsize and regional banks will need to consolidate to more easily meet the new capital ratios.

The U.S. bank system is very fragmented but has been gradually consolidating over decades, so this would not be a departure from long-term trends. That said, there is growing pushback to the capitalization rules in their current form, so some adjustments may be made. Even if proposed changes are enacted with some substance, these mergers may take a year or more to start moving, and could be financing through nondebt-based means.

Among European banks, issuance should remain healthy as they aim to meet their additional loss-absorbing capacity buffers, particularly their eligible minimum requirement for own funds and eligible liabilities instruments.

For China, financial services issuance has slowed in the last two years after years of exceptionally strong growth. We anticipate this moderation will continue given the country’s overarching debt reduction efforts, limiting upside for this sector’s issuance growth globally. That said, issuance could be higher than we expect should authorities in China embark on more aggressive measures to boost economic growth.

Global structured finance issuance could rise 7% this year.  
Through the first quarter of 2024, global structured finance issuance tallied $371 billion, representing a 24% year-over-year increase. However, we expect activity to moderate as the year winds on.

All of the first quarter’s increase was driven by the U.S., which was up roughly 66% while the rest of the world saw flat issuance. Similar to other sectors, we believe much of the increased activity was a result of a pull-forward of activity that would have happened later in the year, given increasing uncertainties ahead.

We expect the U.S., which represents nearly half of global structured finance issuance, to pick up some of the slack that weighed on the sector in 2023. While some subsectors were more resilient than others in 2023, notably asset-backed securities (ABS) and collateralized loan obligations (CLO), residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) have the most growth potential given their lackluster volumes last year.

Through the first quarter of 2024, all four major asset classes have exhibited double- or even triple-digit increases relative to the corresponding period last year. But higher activity in the first quarter is arguably much stronger than underlying collateral growth would indicate: U.S. RMBS was up 88% from the prior quarter, while lagged single-family home sales were up only 6.7%.

The European structured finance market grew 9% through the first quarter, largely from a roughly €11 billion increase in covered bonds. We expect covered bonds to have another strong showing, even if weaker than in 2023, along with a modest pickup in securitization.

We expect U.S. public finance issuance to expand by 5% in 2024. 
Like other sectors, we anticipate slower issuance over the remainder of the year, but still strong enough to produce a year-over-year gain.

Remaining federal stimulus funds and strong financial reserves have given issuers room to delay coming to market at prevailing rates over the last two years, and rainy-day funds have grown–particularly since the start of the pandemic. Nonetheless, first-quarter issuance was up over 25% as municipal issuers took advantage of favorable conditions.

Maturing debt (by face amount) is down slightly for 2024. However, in 2025, this amount will surpass the 2024 total by more than 10%, potentially increasing refinancing needs. Also supportive is the generally strong demand for new debt by investors. Interest-rate differentials between municipal bonds and Treasury securities have been falling, making the asset class more desirable after yields fell below those for Treasuries in 2023.

We expect international public finance (IPF) issuance this year to remain flat.  
However, this sector can move quickly, and we leave open this possibility in our forecast ranges. Much comes down to activity in China, which has accounted for just over two-thirds of the total since 2015. We expect issuance out of China to be stable, but not necessarily expansive given the government’s desire to reduce leverage throughout the economy.

That said, there may still be some growth if local and regional governments issue more debt to alleviate some of the burden on state-owned enterprises by swapping out their debt through IPF debt. This would still require quotas from the central government, so it could come with restraints. And issuance out of China in the first quarter is already down 32% from last year.

Much remains to be seen, but any shift in policy out of China could have very large repercussions for overall issuance. For this reason, our range of projections includes a potential decline for this year, but upside surprises are also possible. For now, we anticipate unchanged quotas for local government general deficit and special-purpose bond borrowing this year, with a general easing of new borrowing over the next few years.

First-Quarter Issuance Summary

Global bond issuance in the first quarter totaled $2.4 trillion, up 14.8% from $2.06 trillion in first-quarter 2023. Global structured finance had the largest increase, up 27.4%, driven by outsize growth in the U.S. U.S. public finance saw a comparable 25.8% growth rate, followed by nonfinancial corporate entities at 21.3%. Despite an 89% increase within the U.S., global financial services issuance grew a more modest 15.5%. IPF was the outlier, with a decline of 16.4%, mainly because of a steep drop from China.

These figures cover only debt with maturities greater than one year and exclude debt issued by supranational organizations and sovereigns. All references to investment-grade and speculative-grade debt are to issues rated by S&P Global Ratings.

Easing Financing Conditions Spurred Record Quarterly Issuance

Market optimism about a “soft landing” in advanced economies resulted in record issuance in the first quarter of 2024, with a massive wave of refinancing and repricing activity amid the reopening of the broadly syndicated loan (BSL) market. Although corporate yields remain relatively restrictive from a historical perspective, they loosened in primary and secondary markets for speculative-grade companies, leading spreads to compress over the last quarter (see table 2).

If it is true that market expectations on policy rate cuts are now more aligned with the Fed’s than at year-end 2023, the latest U.S. macroeconomic data points to delayed monetary policy normalization. Interest rates are likely to remain higher-for-longer as the expected decrease in interest rates appears to be less than previously anticipated, rendering it difficult to believe the first-quarter issuance pace can continue over the rest of the year.

U.S. investment-grade bond volume at a three-year high

Investment-grade corporate entities raised $429.7 billion in first-quarter 2024–the highest quarterly amount since second-quarter 2020. The ‘A’ category contributed 45% of overall investment-grade issuance, against the eight-year average of 39%. U.S.-based health care company AbbVie Inc. (A-/Stable/A-2) issued the most in the quarter, for a cumulative $15 billion with an average 15-year tenor and a 5.1% yield to maturity.

Speculative-grade issuance nearly doubled from the previous quarter to $66.7 billion, the most since third-quarter 2021. The market was particularly active for the ‘B’ category, where primary yields decreased by 200 bps in the quarter. The category contributed half of the quarterly speculative-grade issuance, against its eight-year average of 40%. The largest issuer was TransDigm Inc. (B+/Stable/–), an aerospace and defense company based in the U.S. that issued a total of $4.9 billion at a 6.5% yield to maturity with an average tenor of over six years.

Nonfinancial rated bond issuance was $271 billion in the quarter–2.3x the amount recorded in the last quarter of 2023. Utilities ($56.9 billion), high tech ($53.2 billion), health care ($47.3 billion), and consumer products ($23.6 billion) led by volume. First-quarter rated financial bond issuance was strong at $225.2 billion, with a similar quarterly increase to nonfinancial corporate issuance.

Despite spreads being at their tightest since the beginning of 2022 for investment-grade corporates and 2007 for speculative-grade ones, borrowing costs remain high from a historical perspective. The average yield to maturity offered is currently 2.2x higher than the 2019-2021 level for investment-grade companies and 1.2x higher for speculative-grade companies.

U.S. public finance issuance expands handsomely in the first quarter

U.S. municipal bond issuance in the first quarter of 2024 was $101 billion, down slightly from $103 billion in the fourth quarter of 2023, but up greatly from $80 billion in the first quarter of 2023. The monthly average for the first quarter was $33.6 billion, with March issuance leading at $37.1 billion (see chart 10).

Breaking out issuance so far in 2024 into components:

• New money issuance is 68%, compared with 78% for all of 2023;
• Refunding is 20%, up from 13% for all of 2023; and
• Mixed-use issuance up to 13%, from 9% in 2023 (see chart 11).

The three largest issues in the first quarter were:

• The New York State Dorm Authority, with $2.9 billion in state personal income tax revenue bonds;
• The State of California, with $2.6 billion in various purpose general obligation and revenue bonds; and
• Jefferson County, Alabama, with $2.2 billion in sewer revenue warrants (see table 4).

So far in 2024, issuance by the top 10 states has risen by 35%: ranging from up 371.9% for New Jersey compared with this point in 2023, to down by 11% for Texas (see table 5).

U.S. structured finance issuance increased sharply in the first quarter

U.S. structured finance issuance reached $189.3 billion through first-quarter 2024–a 66% year-over-year increase (see chart 12). We believe higher risk-adjusted yield and the largely stable performance offered by many structured finance sectors will likely remain attractive to most investors.

While rising interest rates and broader market volatility reduced the appetite for longer-duration spreads in the second half of 2022 and into 2023, current conditions have proven opportunistic for this asset class in the U.S. as well.

U.S. structured credit new issuance volume was up 45% through the first quarter of 2024, with BSLs up 45.1% and middle-market CLOs up 47%. The share of middle-market CLOs as a percent of total new issuance (19.7%) remained relatively unchanged through the first quarter relative to the corresponding period last year (19.5%).

Despite the leveraged-loan market lagging 2022’s pace through most of 2023, the 12-month-trailing leveraged loan origination volume increased by 93% through the first quarter, setting the stage for further growth in structured credit issuance in 2024. Furthermore, CLO ‘AAA’ spreads narrowed quite significantly in the first quarter relative to the fourth quarter of 2023, returning to pre-pandemic levels for both BSL and middle-market CLOs.

The recent tightening of spreads reflects improving financing conditions and should bring CLO new issuance, resets, and refinancings well ahead of last year’s pace, depending upon how spreads in the BSL market move. U.S. refinancing and reset volume is up nearly 9,300% across 88 reprints, albeit against just one through the same period in 2023.

ABS. 
With recent U.S. ABS issuance trends so far in advance of typical growth rates amid still-high interest rates, and issuance arguably outpacing underlying collateral growth, we think much of this year’s total–like that in many sectors–has been front-loaded. U.S. ABS issuance recorded a significant 56% gain through the first quarter of 2024, with all major asset classes contributing to the overall increase, outside of esoterics.

Historically, ABS has represented the bulk of U.S. structured finance issuance (approximately 40%), apart from agency RMBS. However, its stronger reliance on consumers may continue to present risks given we expect higher-for-longer interest rates.

Auto loan and lease ABS–which generally leads U.S. ABS issuance, at over 40% of total volume in recent years–is coming off a record year in 2023. Each subsector saw significant increases through the first quarter of 2024 (particularly in the prime auto loan space) despite some affordability challenges posed by macroeconomic uncertainty, rising interest rates, and tighter credit conditions. In aggregate, auto loan and lease ABS is up roughly 45% through the first quarter.

The gap between prime and subprime issuance widened in 2023, with prime auto representing approximately 70% of auto loan issuance. We think this partly reflects higher prices, sales, and investor demand for shorter-duration products, among other factors, and believe this gap could persist in 2024.

Financing Conditions Easing Further In Europe

Credit conditions in Europe eased during the first quarter, especially for speculative-grade issuers, whose primary yields were down by 150 bps. Meanwhile, investment-grade corporates’ borrowing costs did not move much from the end of 2023. This is confirmed by a more benign ECB lending survey reporting credit standards loosened in the first quarter to a relatively neutral level.

The leveraged loan distressed ratio has markedly decreased to 2.8% from 4.3% at year-end 2023. Benchmark yields slightly increased in the quarter on a relatively healthy labor market and increasing geopolitical risk, which may bring additional volatility considering the latest developments. Nonetheless, we maintain our view of three policy rate cuts in 2024 from the ECB, starting from June.

Record issuance for European corporate entities

Investment-grade issuance came out strong at €311.4 billion–2.6x the previous quarter and more than 40% higher than full-year 2023. The first quarter of 2024 marked the highest investment-grade quarterly issuance since 2010. All investment-grade rating categories had solid volume in the quarter, led by the ‘BBB’ rating category at €143.8 billion.

Banks were the largest issuers in the quarter, led by Credit Agricole S.A. (A+/Stable/A-1) at €11.6 billion for financial institutions and high-tech firm Siemens AG (AA-/Stable/A-1+) for nonfinancial corporates, which issued a cumulative €5 billion at a 3.4% average yield to maturity and average tenor of 12 years.

Speculative-grade issuance totaled €45.2 billion–more than doubling fourth-quarter 2023 amounts. The quarter saw the first ‘CCC’/’CC’ activity in two years from two U.K. brokers, buoyed by the marked corporate spread compression:

• Ardonagh Group Finance Ltd. (B-/Stable/–) issued €928 million at an 8.875% yield to maturity with an eight-year tenor.
• Howden Group Holdings Ltd. (B/Stable/–) issued €458 million at an 8.125% yield to maturity with an eight-year tenor.

Rated nonfinancial bond issuance climbed to €101 billion–2.3x over fourth-quarter 2023. Utilities (€22.4 billion), consumer products (€10 billion), automotive (€9.7 billion), and telecommunications (€9.4 billion) led by volume in the first quarter. Rated financial bond issuance remained strong with €254.2 billion, almost tripling previous quarter records.

European structured finance volume was up over 9% in the first quarter

European structured finance volume grew 9.4% through the first quarter of 2024, largely attributable to increases in covered bonds and RMBS (up €11.4 billion and €4.5 billion, respectively), with nearly all of the increase in RMBS coming from the U.K.

Covered bonds. 
Covered bond issuance grew in the first quarter despite a softening economic outlook, with issuance coming off a 10-year high in 2023. A surge in bank deposits and the availability of cheap central bank funding dampened investor-placed issuance in 2020-2021, before it rebounded to record levels as deposit growth slowed and central banks reduced liquidity support.

Furthermore, covered bonds remain insulated from many of the issues disrupting global markets, and normalizing central bank policy in Europe has brought more issuers to market. As rates remain high, issuers will likely continue to favor covered bonds relative to more expensive sources of funding.

The rise in European covered bond issuance is partly attributable to favorable borrowing costs, given higher rates. In addition, over 80% of the ECB’s targeted longer-term refinancing operations–a program to offer longer-duration loans at favorable costs –have now been paid off, which could continue to support covered bond issuance as final maturities approach.

We also expect sustainable covered bond issuance to increase in the near term, given continued regulatory progress in identifying eligible assets.

Leveraged loans and CLOs. 
Primary issuance of leveraged loans in Europe declined substantially in 2023 to near decade lows, despite picking up in the second half. CLO issuance follows the trend in leveraged loan origination volume, with a lag of about four quarters. But even with decreased originations in 2023, the packaging of European CLOs increased 63% through the first quarter of 2024, which we attribute to spreads tightening in the first quarter relative to year-end 2023 and increased year-to-date new loan issuance.

RMBS. 
European RMBS issuance is up over 44% through the first quarter, despite falling roughly 20% year over year in 2023. The increase stemmed mainly from a rise in issuance in the U.K. and Ireland relative to the corresponding period last year. Further, a greater share of year-to-date European RMBS issuance has been originated by banks.

Rated emerging market investment-grade bond issuance rebounded

Corporate spreads in emerging markets tightened quarterly by 50 bps to levels last seen six years ago, triggered by a marked decrease in corporate borrowing costs. However, corporate yields remain higher than their 10-year average, with investment-grade yields sitting at 5.7% (versus 4.4% historically) and speculative-grade yields at 9.1% (versus 8.2%).

Emerging market issuance was particularly high in the quarter, with $450 billion, of which 84% came from China. Outside China, issuance was up 52%, led by Latin America and EMEA.

Rated emerging market issuance was particularly strong for investment-grade corporate entities at $22 billion, from $5 billion in fourth-quarter 2023, led by the ‘A’ and ‘BBB’ categories. Asian Infrastructure Investment Bank (AAA/Stable/A-1+), a multilateral development bank in which China is the largest shareholder, topped the issuer list, with a six-year $5.3 billion note issued at an average 4.1% yield to maturity. Right after, Mexican telecom America Movil S.A.B. de C.V. (A-/Stable/–) placed a 7.6-year $2.2 billion offering at a 10.2% yield to maturity.

Rated issuance among emerging markets in the fourth quarter was limited (see table 8). Rated issuance was diffuse across countries and sectors, indicating selective lending and borrowing as 2023 came to a close.

Including unrated issues, emerging and frontier markets’ corporate bond issuance remained healthy in the fourth quarter. However, the list of largest issuers is completely occupied by Chinese entities, and all issuers were from financial services (see table 9).

IPF issuance fell 16% in the first quarter

It would be difficult to live up to 2023’s record $1.21 trillion of IPF issuance, so the 16% year-over-year decline thus far should not be considered unusual. China accounted for 64% ($158.5 billion) of the first quarter total–lower than the 79% ($234 billion) in 2023–but remained the main driver of global bond issuance for this sector.

Outside of China, issuance was up a much more substantial 41%, with mixed increases and declines across countries. New Zealand, Canada, and France saw the largest increases, but consistent with historical trends, Germany, Canada, Japan, and Australia led the non-Chinese total, accounting for 83.9%, or $75 billion.

Data on non-U.S. public finance volume is not reliable for determining the true size of overall borrowing, but these numbers can point to major trends. In the four years prior to 2020, issuance was extremely high (over $630 billion each year, on average). In 2020, issuance exceeded $1 trillion for the first time. It has remained a $1 trillion bond issuance market since.

Structured finance issuance growth outside of the U.S. and Europe fell 21%

Structured finance issuance outside of the U.S. and Europe was down through the first quarter, with declines in nearly every sector. Only RMBS saw an increase, led by Australia–the only country where it grew relative to the first quarter of 2023.

In fact, most of the new issuance in Australia (which produced the most issuance in the first quarter) was in RMBS. Despite elevated interest rates, which continue to weigh on housing affordability, low unemployment in the region and a stable economic outlook will likely support mortgage originations, particularly as the rental market remains tight.

While Australian ABS did not exhibit year-over-year growth through the first quarter, the sector has gained a significant share of securitized volume over the past few years, which we believe will continue in 2024.

Meanwhile, some sectors saw little to no issuance, such as CMBS and structured credit. Covered bonds, which have seen atypically large issuance from some countries in recent years, appear to have pulled back thus far (down 42%), with no issues from Japan in the first quarter.

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