Debt Issuance Will Fall for the Second Year in a Row as Interest Rates Rise

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This trend could have far-reaching implications for both corporate borrowers and investors alike.

According to a new Fitch Rating analysis, 2022 will see the second-largest fall in non-financial investment-grade (IG) bond issuance since 2008. Volume declined 28% to $439 billion in the first ten months of 2022, following a 32% reduction in 2021.

The par-weighted average coupon for newly issued ‘BBB’ rated bonds, the largest debt category, hit 5.1% in 3Q22, the highest level since 2Q10 and roughly double the average for the previous three quarters. The par-weighted average coupon for the ‘A’ rating categories was 4.3% in 3Q22, up from 2.4% in 3Q21.

“Higher interest rates, a looming recession, and negative returns are adversely weighing on issuance,” Carla Norfleet Taylor, Senior Director at Fitch, stated

 “Some companies may delay issuance until interest rates and market conditions stabilise, but the Fed’s hawkish stance could continue over the near term.”

Furthermore, the yield curve has risen dramatically since 2022 and has been inverted since the summer due to the Fed’s tightening. This has historically been a reliable indicator of an impending recession. Fitch expects the US economy to enter a recession in mid-2023 and upped its policy rate projection last week. We now anticipate a 50 basis point increase to 4.5% in December, followed by a 25 basis point increase in February and March of 2023.

For corporate borrowers, rising interest rates could make it more expensive to issue debt. Borrowers who can’t secure lower-cost financing will be forced to pay higher costs for their debt capital and may need additional sources of capital to meet their obligations.

Despite the decrease in debt issuance, the IG bond market is 5% larger than it was at the end of YE 2021, at $4.9 trillion as of Oct. 31. The rise is due to HY upgrades to IG, as these rising stars contributed $101 billion in volume. At YE 2021, $237 billion in bonds were due in 2022, but just $27 billion remained as of Oct. 31. Maturities are expected to equal $244 billion in 2023 and $298 billion in 2024. The low level of maturity will continue to support the market’s size in the short term.

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