The 2023 Corporate Debt and Treasury Report notes debt capital now accounts for more than one-third (34%) of debt funding among UK corporates. This market has been particularly attractive to corporates with a euro medium-term note programme in place over the last 12 months.
According to S&P Global, global rated corporate debt reached US$23.2trn at the end of June, 2.7% higher than the same time last year and driven by a 4.5% increase in investment-grade debt.
In June, European savings and retirement services group Athora Holding completed a €600m senior unsecured fixed rate notes issuance, its first debt offering in the public capital markets. “The instrument is the first of its kind to be sold to European credit investors and represents an innovation in insurance funding,” says group Chief Financial Officer Anders Malmstrom.
Data from S&P Global Market Intelligence indicates debt issuance by US non-financial corporations totalled US$397.7bn in the first six months of the year, up 36% from the first half of 2022.
September is traditionally one of the busiest months for US debt issuance and a number of major deals were announced last week, including a two-part senior unsecured note offering from Unilever Capital Corp, three-part senior notes from Philip Morris International, and a five-part note offering from Volkswagen.
“There has clearly been a change of paradigm and a new cycle, mostly driven by the significant rates increase in 2022 in the context of quantitative tightening from central banks and rates hikes,” says Xavier Beurtheret, Managing Director and Head of European corporate debt capital markets at Crédit Agricole CIB. “Having said that, most corporates have integrated those new costs of funding and successfully accessed the primary bond market. We have even seen some successful transactions launched by cross-over and high yield names.”
However, for public bond issuance the pre-conditions are stringent (minimum size and credit rating requirements being two major potential impediments) and preclude many issuers suggests Steven Bolton, Head of Corporate Private Credit at LGIM real assets.
It is also difficult for riskier corporates to switch lending markets, for example non-investment grade issuers accessing the investment-grade bond markets. A recent Bank of England report suggests this exposes corporates in riskier credit markets such as leveraged loans, private credit and high-yield bonds to greater risks. Around 30% of leveraged lending is coming up for refinancing in the UK by the end of 2025.
Is it therefore unsurprising that unrated corporates are increasingly turning to term loan private placement markets, which now account for 16% of debt funding.
“While UK and European issuers continue to be generally more reliant on bank market finance than debt capital markets or private placements, we have had a busy first half across sectors and geographies in terms of private credit deployment,” says Bolton.
According to Douwe van Duijvendijk, Managing Director Corporate Debt Capital Markets at ING, the fact that there is still a decent amount of private placement issuance getting done is more eye-catching as under current conditions it would not be strange to see volumes drop where bank alternatives are available.
He suggests volumes are being driven by normal refinancings and issuers who have a view rates will remain elevated.
Vishwanath Tirupattur, Global Director of Fixed Income Research at Morgan Stanley refers to US companies staring down a ‘refinancing wall’ with US$2.6trn in corporate debt coming due between 2023 and 2025. As companies seek to refinance this debt, higher rates will translate into higher cost of debt for companies.
“As a result, we expect to see decompression in corporate credit markets – that is, lower quality credit spreads will widen relative to higher quality credits,” he says.
