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COMMENTS

Credit Trends: Global Financing Conditions: Bond Issuance Will Likely Contract 9% In 2020


Credit Trends: Global Financing Conditions: Bond Issuance Will Likely Contract 9% In 2020

Chart 1

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Table 1

Global Issuance Summary And Forecast
(Bil. $) Industrials¶ Financial services Structured finance§ U.S. public finance International public finance Annual total
2009 1,702.9 1,828.8 572.0 409.7 295.7 4,809.1
2010 1,287.3 1,481.6 895.0 433.3 306.9 4,404.1
2011 1,336.9 1,331.9 942.4 287.7 336.3 4,235.2
2012 1,764.7 1,562.4 786.1 379.6 339.1 4,831.9
2013 1,881.8 1,529.3 803.5 334.1 316.2 4,865.0
2014 2,054.1 2,017.5 905.3 339.0 340.2 5,656.2
2015 2,026.0 1,744.4 905.0 397.7 446.5 5,519.6
2016 2,251.2 1,919.9 807.6 444.8 740.5 6,163.9
2017 2,275.2 2,077.7 901.8 448.6 542.1 6,245.3
2018 2,013.6 1,964.9 1,062.0 338.9 482.7 5,862.1
2019 2,417.7 2,188.2 1,127.9 421.7 761.8 6,917.2
2019* 602.6 585.9 271.2 79.1 252.2 1,791.0
2020* 707.0 627.6 254.6 89.5 222.0 1,905.7
2020 full-year forecast (% change, year over year) (10) (3) (25) (5) (4) (9)
¶Includes infrastructure. §Structured finance excludes transactions that were fully retained by the originator, domestically rated Chinese issuance, and CLO resets and refinancings. Sources: Thomson Financial, Harrison Scott, and S&P Global Ratings Research.

S&P Global Ratings Research expects global bond issuance this year could fall about 9% below the 2019 total because of the COVID-19 pandemic and the resulting economic slowdown as a result of governments enforcing social distancing measures to contain the rise in new cases. S&P Global economists expect the global economy will contract by 2.4% this year. This recession is likely to be especially deep in the near term, but the recovery will likely begin in the third quarter of this year. In an effort to minimize economic losses and reopen financial markets, many governments and central banks have enacted backstop measures to support businesses and consumers. This unprecedented combination of economic stressors and policy reactions complicates our issuance forecasts; however, we feel that ultimately fiscal and monetary responses will only act as a form of damage control against the near complete shutdowns of substantial parts of most countries' economies.

Risks remain firmly on the downside. Social distancing measures in many countries are now expected to last longer than initially thought, deepening the contraction in output and risking a slower recovery. Support measures by central banks and governments have helped stabilize financial markets, but these actions can never be a cure-all on their own. Financial markets have also been taking heart from the pace of new cases slowing or declining in many countries. That said, the fundamental headwind of the virus and the necessary containment measures, which cost the economy dearly, are still present. And though the pace of new cases appears to be moderating in most of the developed world, nascent signs of resurgence are appearing in some areas--signaling COVID-19 could be present for the remainder of 2020. Many emerging markets are also less equipped to contain the virus and treat the ill, which could exacerbate or lengthen their situations.

We Expect Nonfinancial Issuance To Contract By 7%-14% In 2020

With the global economy expected to contract this year, we expect nonfinancial bond issuance will follow suit, though perhaps not directly reflecting the path of the economy. Various monetary policies and fiscal programs will likely offer support for some parts of the economy. These measures are also intended to be short term, with the Federal Reserve's new facilities expiring on Sept. 30 and many similar initiatives expiring at year-end in Europe.

Basic funding liquidity needs will dominate as the driver of bond issuance through the next quarter or two. In all likelihood, the surge in investment-grade bond issuance since the Fed created its suite of liquidity facilities on March 23 was motivated by the opportunity to access funds at favorable rates to steer through what will likely be two quarters' worth of dismal earnings reports. More "organic" drivers of issuance, such as mergers and acquisitions (M&A), increased dividends, capital expenditure, and share buybacks, will likely take a back seat for some time. In fact, in March, the global pipeline of announced M&A deals reached its lowest point in years--totaling only $159 billion--and we expect this general decline to continue. Refinancing needs remain robust, with over $1 trillion of debt issued out of China scheduled to mature over the next three years. However, in all cases, where not immediate, refinancing needs may be pushed into next year in hopes that financing conditions may be more favorable.

Major central bank and fiscal measures could also complicate the picture as some policies may give a boost to bond issuance, while others may act as substitutes. For example, the Fed's primary and secondary market facilities saw an immediate and strong response from primary bond markets in the investment-grade space. Further expansion of these programs on April 9 led parts of the speculative-grade market to open as well. But while the primary and secondary facilities buy debt directly, the Fed's Main Street Lending Program could offer an alternative to the bond market for more highly leveraged firms because this program operates via term loans. We are still in the early days of these programs, with perhaps more to come, and with implementation becoming more clear as time passes. Their ultimate impact on issuance will not be fully known for some time.

Financial Issuance Will Likely Fall Between 1%-5% In 2020

Similar to nonfinancial corporates, we expect issuance from financial services companies to face headwinds from the slowing global economy. However, there are some countermeasures as well.

Central bank actions in China have continued to some extent in response to the virus, though to a much lesser extent than in the U.S. or Europe. Still, history has shown that easing monetary policies in China often leads to increased issuance among the country's banks. Lowering interest rates in the near term, combined with lowering reserve requirements should encourage banks to take on more debt to re-lend through the financial system.

Excess reserves held by U.S. banks with the Fed have increased substantially in the first quarter, and this tends to be a leading indicator of bank issuance. Though not as extreme as the record-setting March total, U.S. financial services companies also saw a healthy increase in issuance during the first quarter, generally at the same pace as the increase in excess reserves.

The sizeable upcoming maturity profiles of global financial institutions through 2022 offer support for refinancing needs, particularly in China. While central banks may dial back their recent quantitative easing measures toward the end of the year, they will likely retain their now much lower policy interest rates for some time, making debt issuance attractive as the recovery kicks in and expands. For now, private-sector rates are higher than at the start of the year, but they should fall once confidence in the macroeconomy is restored.

We Expect Global Structured Finance Issuance To Decline By Roughly 25% In 2020

We now expect global structured finance issuance to contract by 20%-30% by the end of 2020. Underlying fundamentals stymieing structured finance issuance have been intensified given the effect of the pandemic on the sector. We expect new origination volume out of the U.S. to decline about 20% from 2019, while Europe could see a more severe deterioration of 30%. Regions outside the U.S. and Europe could see the most drastic decline in new issues, as extreme as a 40% decline in volume.

Despite the pandemic, mixed performance across U.S. asset classes will continue to be a common theme. New volume from the asset-backed securities (ABS) sector will likely see the most mild impact of all the U.S. sectors, with an expected 9% decline, given inherently short maturities and support from the Term Asset-Backed Securities Loan Facility (TALF). In the last financial crisis, the ABS sector saw high utilization rates throughout the duration of the program in 2009 and 2010. U.S. residential mortgage-backed securities (RMBS) issuance could see a decline of up to 20% as buyers are kept from the market despite a low interest-rate environment. We expect a decline in volume of 25% for commercial mortgage-backed securities (CMBS), given the sector's exposure to economic volatility and real estate debt funding. As a practical matter, there may be an inability to perform site visits for all type of syndicated real-estate-related debt issuance. The greatest drop off in new volume relative to prior years will be that of collateralized loan obligations (CLOs), at about 30%. Even before the global impact of COVID-19, underlying leverage loan issuance, a leading indicator of new-issue CLO, had declined 25% since July 2018 on a rolling-12-month basis as of the start of 2020. Demand for CLOs will likely wane further given the inherent structure of being backed by high-yield corporate credit, which itself is expected to decline. However, the recent inclusion of 'AAA' rated CLOs in the U.S. TALF program may boost demand.

European securitizations could see an overall decline of 30% as underlying fundamentals across the region are weaker overall than they are in the U.S. We expect European ABS to see some of the lowest exposure to risks due to COVID-19. However, two-thirds of issuance is from nonbanks, limiting the cannibalization effect from central bank funding schemes. We expect medium exposure to the substitution effect of central banks for European RMBS volume because more than half of its issuance is bank-originated, which will see a negative supply effect from relaunched central bank funding options (and also from covered bonds). Even the portion of nonbank issuance that is backed by older collateral from central banks is unlikely to return while spreads remain dislocated, especially because it is often backed by lower quality collateral. However, , retained transactions could act as central bank collateral.

There's little impetus to bring new CMBS to market, and no upcoming maturities on existing deals. CLO deals in Europe are less exposed to COVID-19-related risk than in the U.S. given lower energy exposures. Credit pressure and major repricing of CLO tranches mean transaction economics do not currently work without big changes to debt structures. Returns are contingent on greater risk appetites or a buildup of wider-priced loan originations that could match high liability costs. Covered bond exposure is low given it's largely rated 'AAA' and is considered a safe haven asset class that will also be well supported by quantitative easing, essentially leaving demand largely unchanged.

Outside the U.S. and Europe, we expect issuance to largely decline. Australia, specifically, is dominated by an RMBS market that will face liquidity stress, coupled with an upswing in borrowers unable to meet scheduled loan repayments, affecting cash flow to RMBS transactions. Policy measures have been announced to offset a worsening financial downturn. In Japan, an already pressured RMBS market will likely see further deterioration in new issue volume. We expect Japanese ABS to decline as well, but not to the scale of RMBS. Additionally, cash reserve accounts for all of our rated private-sector RMBS and ABS have sufficient funds to cover at least three monthly interest payments and maintenance costs, although the actual amount varies among transactions. We believe this should further allay concerns.

U.S. Public Finance Issuance Stalls

U.S. municipal bond issuance in March 2020 saw a deep drop from issuance levels in recent years, falling to just under $17 billion, down from $40.6 billion in February. The last time monthly issuance was this low was February 2014, and there hasn't been a monthly drop of this magnitude since the dramatic swings at the start of 2018 saw as the tax cut went into effect. April is shaping up to see similar levels of issuance to March.

Our forecast of issuance through the end of the year is very volatile because so much depends on how quickly economic activity resumes and where, as well as what aid is made available to state and local governments by the Fed or by Congress. At this time, we expect issuance to contract between 3%-7%. We see depressed issuance among the long-term debt we track to continue as we have seen in March and so far in April, at least through the near-term. That situation could change if relief passes through Congress, or a major change in the trajectory of the COVID-19 outbreak occurs.

An additional consideration is alternative funding sources in the current environment. This includes direct bank loans and the possibility for the Fed's Municipal Liquidity Facility's short-term financing options to take the place of the long-term bond debt we track. However, at this time, we do not believe any issuers have used this funding route.

International Public Finance Remains Strong, For Now

International public finance volume was down through the first quarter, relative to the same period in 2019, but issuance has more than rebounded in the first three weeks of April, pushing the year-to-date total up approximately 4%-5%. It is unclear if this pace can be sustained while the global recession continues, though in a positive sign, issuance excluding China is leading the expansion, rather than the typical reliance of this sector on that one country.

For now, we project that in 2020 the economic fallout from the virus may overtake the current momentum we're seeing in this asset class. Issuance could be flat to down 8%. The pipeline of maturing bonds is set to decline in 2020, but there is a comparably massive supply of maturing debt coming due between 2021 and 2024. The need to refinance this debt should produce some issuance this year; however, these needs may be addressed in 2021 when credit markets regain more stability.

Because we report our issuance figures in dollars, exchange-rate fluctuations are always a consideration. The U.S. dollar has seen some volatility since the virus' spread has widened--at first appreciating, but then depreciating after the Fed's massive liquidity facilities. Our economists expect that over the course of this year, the dollar will appreciate somewhat over 2019.

First-quarter summary

Global new bond issuance in the first quarter of 2020 totaled $1.9 trillion, up 6.4% relative to the first quarter of 2019. Some sectors saw large increases, such as industrials (up 17.3%) and U.S. public finance (up 13.1%); while others saw declines, like international public finance (down 12%), and structured finance (down 4.3%). In most cases, issuance totals were quite strong in January, and even February; however, most regions and sectors saw large declines in March as the spread of the coronavirus reached pandemic portions.

These figures include only long-term debt (maturities greater than one year) and exclude debt issued by supranational organizations. All references to investment-grade (rated 'BBB-' or higher) and speculative-grade (rated 'BB+' or lower) debt refer to those issues rated by S&P Global Ratings.

Virus Prompts Largest Fed Actions Yet

While the economic outlook continues to worsen, financing conditions in the U.S. have been gradually improving after the Fed's historic liquidity facilities. The now combined $2.3 trillion programs have been a tremendous support for borrowers, with investment-grade corporates benefitting most, thus far. In fact, after the initial announcement on March 23, the last seven business days of the month saw more than $152 billion in investment-grade corporate bond issuance—higher than all but two prior months' totals. For the full month, investment-grade corporate issuance totaled $249 billion.

In its April 9 announcement, the Fed critically identified fallen angel debt as being eligible for its primary- and secondary-market facilities, provided the issuer had an investment-grade rating (or at least two, if rated by more than one agency) on March 22. In doing so, the Fed has effectively made itself a source of absorption for fallen angel debt, which we expect to be sizable this year (see "'BBB' Pulse: U.S. And EMEA Fallen Angels Are Set To Rise As The Economy Grinds To A Halt," published April 8). This helps take some the burden off of traditional participants in the speculative-grade market. In fact, the primary and secondary facilities are roughly $750 billion--well above the $475 billion in debt we expect will be downgraded to speculative-grade in the U.S. this year (although fallen angel debt isn't the only purpose of these facilities).

Meanwhile, the speculative-grade segment (including leveraged loans) was effectively shut down in March. In April, some issuers have issued bonds, however the bulk of these deals are rated in the 'BB' category, and most are secured-debt offerings. Notably, in its return to primary markets after its recent fall to speculative-grade, Ford Motor Co. issued over half of the $15 billion bond total since April 13, though it did so at coupons between 2%-3% higher than what was in the secondary market. Though narrowing at a comparable rate to investment-grade spreads, speculative-grade spreads remain prohibitively high for weaker borrowers at a time when revenues are expected to dwindle. And defaults are already picking up: Monthly default tallies from January through mid-April are six, seven, eight, and 13. With so many firms missing interest payments and more expected to soon, lenders are wary of offering funds to lower-rated firms for the moment.

An additional consideration is the very different natures of the primary- and secondary-market facilities, and the Main Street Facilities. In the former, the Fed inserts itself into the bond market as a large-scale buyer of debt. In the latter, an alternative source of funding is offered in the form of term loans with ultralow borrowing costs of 250 basis points (bps) to 400 bps over the secured overnight financing rate (SOFR). With SOFR effectively at zero, these loans make for a strong alternative to conventional funding markets for small and midsize firms rated speculative-grade. The Main Street facilities total $600 billion, which is already slightly more than the average combined annual total of speculative-grade bond and institutional leveraged-loan issuance in recent years.

Table 2

Indicators Of Financing Conditions: U.S.
Restrictive Neutral Supportive 2020* 2019* 2018*
M1 money supply (% change, year over year) x 21.3 1.8 6.2
M2 money supply (% change, year over year) x 14.8 3.9 4.0
Triparty repo market - size of collateral base (bil. $)§ x 2,703.9 2,228.2 1,793.3
Bank reserve balances maintained with Federal Reserve (bil. $) x 2,041.3 1,626.0 2,118.5
Three-month nonfinancial commercial paper yields (%) x 1.51 2.47 2.02
Three-month financial commercial paper yields (%) x 2.44 2.43 2.21
10-year Treasury yields (%) x 0.70 2.41 2.74
Yield curve (10-year minus 3-month) (bps) x 59 1 101
Yield-to-maturity of new corporate issues rated 'BBB' (%) x 3.85 4.10 3.93
Yield-to-maturity of new corporate issues rated 'B' (%) x 7.75 8.79 7.01
10-year 'BBB' rated secondary market industrial yields (%) x 4.37 4.28 4.28
Five-year 'B' rated secondary market industrial yields (%) x 13.89 7.44 6.53
10-year investment-grade corporate spreads (bps) x 293.0 149.4 127.2
Five-year speculative-grade corporate spreads (bps) x 850.2 385.2 330.2
Underpriced speculative-grade corporate bond tranches, 12-month average (%) x 10.4 17.4 15.9
Fed lending survey for large and midsize firms¶ x 0.0 2.8 (10)
S&P Global corporate bond distress ratio (%) x 23.4 7.0 5.4
S&P LSTA Index distress ratio (%) x 31.1 3.2 2.1
New-issue first-lien covenant-lite loan volume (% of total, rolling 3-month average) x 85.2 77.0 82.8
New-issue first-lien spreads (pro rata) x 303.4 326.5
New-issue first-lien spreads (institutional) x 418.8 403.6 330.4
S&P 500 market capitalization (% change, year over year) x (9.3) 5.0 11.0
Interest burden (%)§ x 10.6 11.2 10.9
*Data through March 31. ¶Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices For Large And Medium-Sized Firms, through fourth-quarter 2019. §As of Dec. 31, 2019. Sources: IHS Global Insight, Federal Reserve Bank of New York, S&P LCD, and S&P Global Ratings Research.

The Fed's recent actions have provided an obvious boost to investor confidence. However they're not a cure-all on their own. The fundamental headwind of the virus and the necessary containment measures are still present. And while the pace of new cases appears to be moderating in most of the developed world, nascent signs of resurgence are appearing in China and northern Japan--meaning the pandemic could prove a stubborn foe.

For now, markets are still reflecting heightened stress relative to the start of the year--but certainly less than before the Fed's actions. This has caused financing conditions to take on a more mixed stance recently (see table 2). Though it's tempting to take recent investment-grade bond issuance as a signal that markets have turned a corner, this comes with caveats. Most of the new issuance was by large, well-established blue-chip firms who can command favorable financing conditions in most settings. Also, most of the issuers haven't used the Fed's primary market program; most hit the market with maturities far in excess of the five-year or less threshold for eligibility. More than likely, the firms that have come to market have done so to secure cash at favorable yields on the heels of the positive market response to the Fed to get ahead of what will undoubtedly be dismal earnings reporting seasons in April and July.

U.S. corporate issuance reaches a new monthly high in March

Quarterly U.S. corporate rated bond issuance grew to a record $465.8 billion in the first quarter, 20.8% higher than the previous record set in the first quarter of 2017. Issuance in March totaled $250.1 billion, a record for monthly issuance, with 53.5% of this coming after the March 23 announcement by the Federal Reserve outlining the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility to support market liquidity.

Investment-grade corporate issuance totaled $408.3 billion in the first quarter, setting a record 23% higher than the previous one set in the first quarter of 2009. This makes sense given the extraordinary actions taken by the Federal Reserve and Treasury to support markets. The pace of investment-grade issuance has slowed somewhat during the first few weeks of April but remains strong.

Speculative-grade issuance totaled $57.5 billion during the quarter, which compares well historically. However, 92.6% of speculative-grade issuance was issued before Feb. 24, when markets began to price in the risks related to COVID-19. Speculative-grade issuance came to a halt from March 5 to March 27--17 consecutive days without a deal. Speculative-grade issuance has begun to rebound in April but remains challenged, especially for entities rated 'B-' or lower.

In the first quarter, nonfinancial corporate rated bond issuance grew 54.5% compared with first-quarter 2019 to $320 billion. Issuance in the high tech, consumer products, and retail and restaurants sectors accounted for 39.1% of all nonfinancial issuance with $50.7 billion, $39 billion, and $35.5 billion, respectively. Financial corporate rated bond issuance grew 19.4% to $145.8 billion. Issuance remains strong for both financial and nonfinancial rated corporate issuers.

Chart 2

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Topping the list of issuers in March were two high tech companies (see table 3). Oracle Corp. issued an impressive $20 billion on March 30 in a six-part senior unsecured note offering. If it uses the proceeds to increase the pace of share buybacks, S&P Global Ratings would likely lower the issuer credit rating. Intel Corp. issued $8 billion in a six-part senior unsecured note offering on March 20. It plans to use the proceeds for general purposes, including refinancing outstanding debt and share repurchases.

Table 3

Largest U.S. Corporate Bond Issuers: December 2019
Issuer Sector (Mil. $)

Oracle Corp.

High technology 19,953.4

Exxon Mobil Corp.

Oil and gas 8,500.0

Wells Fargo & Co.

Banks and brokers 8,312.5

Intel Corp.

High technology 7,971.2

Bank of America Corp.

Banks and brokers 7,001.4

PepsiCo Inc.

Consumer products 6,462.8

Nike Inc.

Consumer products 5,985.0

Walt Disney Co.

Media and entertainment 5,981.3

McDonald's Corp.

Retail/Restaurants 5,539.3

Citigroup Inc.

Banks and brokers 5,300.0
Morgan Stanley Banks and brokers 5,014.6

Nvidia Corp.

High technology 4,987.2
Coca-Cola Co. Consumer products 4,985.9

Procter & Gamble Co.

Consumer products 4,981.0

Home Depot Inc.

Retail/Restaurants 4,959.8
*Includes issuance from Bermuda and the Cayman Islands. Source: Thomson Financial; S&P Global Ratings Research.
Leveraged loan new issue market halts as secondary market suffers extreme losses

The first quarter ended in stark contrast to the way it began: with a sharp sell-off in the leveraged loan market globally, shutting the primary market. The year had a very buoyant start. In January, issuers poured in to the market to opportunistically address existing debt, and repricing volume came close to its all-time peak. By early February the market showed signs of balancing out, but then it spiraled downward through March and into quarter-end as the economic consequences of the pandemic sent repeated shock waves through financial markets.

The S&P/LSTA Leveraged Loan Index tumbled by 12.37% in March, the second steepest monthly decline in its 23-year history. Before COVID-19 swept the globe, the top three biggest losses for loans were during the global financial crisis following the Lehman Brothers bankruptcy in September 2008.

Chart 3

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In a matter of weeks, sharp declines across the board dramatically reshaped the distribution of prices within the index. At the beginning of March, 55% of the loan market was priced between 98 and just under par, with roughly 30% between 90 and 98. By the third week of March, 40% of the index occupied the 80–90 range, with another 42% at 70–80.

Chart 4

image

In January, new-issue institutional volume spiked to $64.7 billion, the second-heaviest monthly deal flow on record, behind $78 billion in January 2017. But cracks began appearing in February as spreads widened and issuers made concessions to get some deals across the finish line. However, many were stranded, forcing a string of postponements. The window for new issues slammed shut, and March--in stark contrast to January--closed with no new institutional loan volume, which hasn't happened since December 2008.

Chart 5

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Even with the issuance shut down in March, first-quarter volume was still ahead of the comparable period in 2019. In fact, it was just shy of the $93 billion quarterly average for institutional volume over 2018 and 2019.

Chart 6

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The unprecedented seizing of the economy sent many leveraged issuers scrambling to shore up their liquidity to weather the storm. Scores of companies drew down all or part of their revolving credit facilities to put cash on the balance sheet, while others locked up short-dated term loan As to give themselves some flexibility--HCA Healthcare, American Airlines, and United Airlines were among the latter. The $175 billion total that LCD tracked in March was more than the total new issuance (institutional and pro rata) during the entire first quarter ($123 billion). The consumer discretionary sector accounts for more than half of total revolving credit drawdowns.

Chart 7

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Uncertainty of the duration of the pandemic and the economic crisis has left the timing of the leveraged loan market's revival up in the air. Participants indicate the market will need several weeks of stability before attempts to open the primary market will be realized, particularly with large M&A deals.

And there are still some bulky commitments on the shadow calendar, such as LogMeIn and Caesars/Eldorado. T-Mobile said it's prepared to draw on its massive bridge financing to close its merger with Sprint. LCD's market sources note that this can create something of a logjam if arrangers are less inclined to take on new commitments with deals still on their books.

Municipal volume is down through the first quarter

The municipal volume of $89 billion in the first quarter this year was higher than the first quarter of 2019, when $79.1 billion was issued and issuance was still at a lower baseline following the passage of the U.S. tax law. However, the fourth quarter of 2019 saw $143 billion in issuance, and the increase continued in January and February.

Chart 8

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Refunding volume significantly decreased in 2018 and slightly increased in 2019, though it's still far below the pre-tax reform average of $149 billion per year from 2012 to 2017 (see chart 9). About 38% of 2019 volume has been for refunding or issues that combine refunding with new money--a little higher than the 31% in 2018. In 2017, about 55% of volume went toward refunding or combined uses. We will be watching to see if the change in the rate between new and refunding issuance continues or if it is the result of the small sample size of only three months.

Chart 9

image

California issued the largest transaction in March, for $2 billion, followed by New York, with $1.3 billion (see table 4).

Table 4

Largest U.S. Municipal Issues: March 2020
Issuer (Mil. $) Date
California 2,095.7 3/10/2020

New York City-New York

1,300.0 3/4/2020
Maryland 777.2 3/4/2020

Missouri Hlth & Ed Facs Authority

450.0 3/26/2020
NYC Municipal Water Fin Auth 399.3 3/11/2020
Phoenix City Civic Imp Corp 393.1 3/26/2020

Louisiana

361.8 3/5/2020

Univ of Texas Sys Brd of Regents

347.6 3/5/2020
Gainesville & Hall Co Hosp Auth 339.3 3/3/2020

Arizona Industrial Dev Auth

236.8 3/27/2020
Sources: Thomson Financial and S&P Global Ratings Research.

California-based entities issued more than those in any other state in March, with $3.8 billion. For the full year, California and New York have both issued more than $11 billion (see table 5). For California, that represents an almost 50% increase from the same time last year, while New York has issued 23% less than it had through March of 2019.

Table 5

Top 10 States by Bond Sales, March 2020
--2020-- --2019--
State Rank Volume (Mil.) March volume (Mil.) Rank Volume (Mil.) Change from previous year (%)
California 1 11,903.7 3,820.6 3 8,048.9 +0.5
New York 2 11,062.5 2,901.4 1 14,502.8 –0.2
Texas 3 9,980.5 1,522.3 2 8,938.1 +0.1
Florida 4 9,149.5 536.6 11 1,864.4 +3.9
Pennsylvania 5 3,574.8 361.5 7 2,482.5 +0.4
Massachusetts 6 2,957.0 754.8 4 3,892.7 –0.2
Colorado 7 2,935.1 305.4 5 2,912.9 +0.0
Ohio 8 2,873.9 691.9 6 2,513.0 +0.1
New Jersey 9 2,107.6 259.8 21 1,151.9 +0.8
Georgia 10 2,034.0 566.7 19 1,337.6 +0.5
Sources: Thomson Financial and S&P Global Ratings Research.
Structured finance issuance increases slightly in the first quarter

Kicking off 2020, structured finance issuance in the U.S. reported one of its highest first-quarter totals in dollar volume, following the historical low of 2009 during the previous financial crisis. There was $117 billion in structured finance issuance in the U.S. in the first quarter of 2020, up 1.4% from 2019. The largest increase in new volume came from the CMBS sector, with $19.6 billion in the first quarter, an over 53% increase from the same period in 2019. New originations from the RMBS sector were up as well, with a smaller 11% increase over the same period. The total of $25 billion for RMBS for first-quarter 2020 was the highest post-crisis dollar volume for the sector, following the historical bottoming out in 2011. ABS issuance declined 7% annually in the first quarter to $49 billion, while structured credit saw a more severe decline of 15% over the same period to $23 billion.

Chart 10

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Despite headline figures for first-quarter 2020 looking promising for the coming year, the COVID-19 pandemic started to hamper demand for new issuance in the final month of the first quarter. In the first two months of 2020, each major sector of U.S. structured finance reported higher monthly volumes compared with March, with the exception of structured credit. In each of the remaining sectors, new volume in March almost halved compared what was issued in February.

In response to declining economic conditions in light of the global and U.S. response to COVID-19 and the developing global recession, the U.S. Federal Reserve enacted on April 9, 2020, the term asset-backed securities loan facility (TALF) special purpose vehicle (SPV), which it used previously to bolster the securitization market in 2009 and 2010. The TALF SPV will make $100 billion in loans initially available. Further, the loans will have a term of three years, will be nonrecourse to the borrower, and will be fully secured by eligible ABS. In terms of eligible collateral, all must be ABS, where the underlying credit exposures include auto loans and leases, student loans, credit card receivables (consumer and corporate), equipment loans and leases, floorplan loans, insurance premium finance loans, specific small business loans that are guaranteed by the Small Business Administration, leveraged loans, or commercial mortgages.

New issue CLO volume fell to $23 billion in the first quarter of 2020, down 15% compared with the same period in 2019. Contrary to other major U.S. sectors, March had the highest monthly total so far this year at $11 billion. Going into 2020, expectations for CLO issuance were negative with respect to the prior year, as leverage loan volume, a leading indicator of CLO issuance, had been steadily declining since the middle of 2018. In the first quarter of 2020, leverage loan volume fell 79% since July 2018, indicating lower levels of future new issue CLOs. Further, CLOs are particularly vulnerable to the impact from COVID-19 because of the inherent structure of underlying loans containing high-yield corporate debt. However, some relief may be allowed from the recent inclusion of 'AAA' rated CLO in the TALF SPV.

The ABS sector originated $49 billion in new loans in the first quarter of 2020, the lowest first-quarter total in the past three years. In March there was just $12.7 billion in new volume, the lowest for any March since 2012. Weakness emanated primarily from the auto loan sector, whose exposure to auto sales has dampened overall volume because demand has all but dissipated in light of the pandemic. However, before the impact of COVID-19, we expected overall ABS volume for the year to deteriorate slightly. Given the relatively short terms of ABS collateral, we expect the pandemic to only minimally affect issuance, and the TALF SPV should specifically bolster this sector and proved to be highly utilized during its previous implementation in 2009.

The RMBS sector reported $25 billion in new issue volume for the first quarter of 2020, up 11% compared with the same period in 2019. However, like most other sectors, RMBs saw origination volume decline significantly in March. In January and February, RMBS issuance was respectively $9.4 billion and $10.5 billion, and it fell to $5.5 billion in March. Further declines are expected throughout the year, as potential homebuyers are kept from the market despite a low interest rate environment. Because home sales are a leading indicator of RMBS issuance, we expect the sector to experience hardship in the face of supply.

The first quarter of 2020 was one of the best since the financial crisis for CMBS, originating $19.6 billion in new volume, up over 50% compared with the first quarter of 2019. The sector also saw new originations halve in March to $3.4 billion, compared with $7.2 billion and $9.1 billion, respectively, in January and February. We expect continued deterioration in new issue volume throughout the year, given the sector's exposure to economic volatility and real estate debt funding. There is also the further inability to perform site visits for all types of syndicated real-estate related debt issuance.

European Markets Were Hit Earlier, Remain Slow For Longer

After China's outbreak peaked in January, the virus's epicenter moved to Europe in February, with Italy being particularly hard-hit. As a result, the impact on first-quarter issuance and financing conditions trends began earlier and were deeper than in either the U.S. or China, where the pandemic hit later and was contained sooner, respectively. Where lending occurred, interest rates remained favorable with higher-rated entities, but stress within the speculative-grade segment increased considerably (see table 6).

With a substantial portion of the economy grinding to a halt, many business payments and contracts are being withheld, postponed or not honored at all. This is forcing companies to scramble to shore up liquidity in any ways that they can. Similar to the U.S., financing conditions have largely turned negative against a backdrop of limited lending driven by the need for funding to support working capital. Meanwhile, more discretionary uses of proceeds such as capital expenditure, share buybacks, and increased dividends are being scaled back sharply.

Fiscal and monetary authorities have rolled out emergency measures to bridge short-term liquidity problems to try to avoid a surge in insolvencies and unemployment. The fiscal programs are enormous, ranging from 7% of GDP in Italy to 32% of GDP in Germany, and are delivered in the form of grants, loan guarantees, deferred tax arrangements, and worker subsidy packages.

This, alongside the ECB's creation of the €750 billion PEPP, has helped European financial markets see some stability in recent weeks. Additionally, the Fed's recent actions appear to have also contributed much to global financial market confidence--not just in the U.S.

As elsewhere, though providing some stability for the time being, these emergency measures have not led to an improvement in business conditions or financial risk profiles. Primarily, that is reliant on the infection rate being contained below 1.0 and the societal lockdowns being ratcheted down significantly.

Table 6

Indicators Of Financing Conditions: Europe
Restrictive Neutral Supportive 2019 2018 2017
M1 money supply (% change, year over year*) x 8.2 6.8 7.9
M2 money supply (% change, year over year*) x 5.8 4.7 4.3
Three-month euro-dollar deposit rates (%) x 1.05 2.60 2.20
ECB Lending Survey of Large Companies¶ x 0.41 -5.12 -5.92
Yield-to-maturity of new corporate issues rated 'A' (%) x 1.85 1.64 2.55
Yield-to-maturity of new corporate issues rated 'B' (%) x 12.00 6.35
European high-yield option-adjusted spread (%)§ x 7.54 3.92 3.15
Underpriced speculative-grade corporate bond tranches, 12-month average (%) x 16.3 28.9 21.2
Major government interest rates on 10-year debt x
S&P LCD European Leveraged Loan Index Distress Ratio (%) x 35.6 1.39 0.76
Rolling three-month average of all new-issue spreads: RC/TLA (Euribor +, bps) x 306.3 331.1
Rolling three-month average of all new-issue spreads: TLB/TLC (Euribor +, bps) x 355.5 405.6 364.2
Cov-lite institutional volume: share of institutional debt (%, rolling three-month average) x 99.0 97.3 84.3
Data through March 31. *Through Nov. 30. ¶European Central Bank Euro Area Bank Lending Survey for Large Firms, fourth-quarter 2019. §Federal Reserve Bank of St. Louis. Sources: IHS Global Insight, ECB, S&P LCD, and S&P Global Ratings Research.
Corporate bond issuance in Europe contracts in the first quarter

Quarterly corporate rated bond issuance out of Europe fell 14.2% to $237.8 billion in the first quarter compared to the first quarter in 2019 (see chart 5). Issuance in March totaled $64.5 billion, a decline of 33.2% from a year ago.

Investment-grade corporate issuance totaled $200 billion in the first quarter, 20% lower than a year ago, while speculative-grade issuance totaled $37.8 billion, 38% higher than a year ago. However, 100% of speculative-grade issuance was issued before Feb. 24. Speculative-grade issuance came to a halt in February with 26 consecutive days without a deal from Feb. 21 to March 31. Investment-grade issuance began to pick up in the final week of March and has continued through the first few weeks of April, but speculative-grade issuance remains challenged.

In the first quarter, nonfinancial corporate rated bond issuance fell 2.1% compared to first-quarter 2019 to $97 billion. Issuance in the retail and restaurants, telecommunications, and consumer products sectors accounted for 35.6% of all nonfinancial issuance with $13.8 billion, $10.5 billion, and $10.2 billion, respectively. Financial corporate rated bond issuance fell 21% to $140.8 billion. Some of the drop in dollar issuance is attributable to dollar strength, with both the pound and euro depreciating against the dollar from a year ago. Issuance rebounded for both financial and nonfinancial rated corporate issuers in the final week of March and remains strong.

Chart 11

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There were no particularly large deals in March. French companies topped the list of largest issuers, each issuing about $2.7 billion (see table 7). Airbus SE led the group with $2.74 billion in a three-part senior unsecured note offering on March 31. Our rating on Airbus is currently on CreditWatch negative due to aircraft delivery delays linked to COVID-19.

Table 7

Largest European Corporate Bond Issuers: March 2020
Issuer Country Sector (Mil. $)

Airbus SE

France Aerospace and defense 2,739.3
ADP France Transportation 2,715.1

Engie SA

France Utility 2,659.6

HSBC Holdings PLC

United Kingdom Banks and brokers 2,496.9

Volkswagen Finl Svcs AG

Germany Financial institutions 2,365.4
EFSF Luxembourg Financial institutions 2,362.2

Diageo Finance Plc

United Kingdom Consumer products 2,230.5

Relx Finance B.V.

Netherlands Banks and brokers 2,216.0

John Deere Cash Management S.A.

Luxembourg Capital goods 2,201.9

Credit Suisse Grp Ag

Switzerland Banks and brokers 2,198.2

Barclays PLC

United Kingdom Banks and brokers 2,198.2

Nestle Finance Intl Ltd

Luxembourg Banks and brokers 2,141.3

Unilever NV

Netherlands Consumer products 2,134.2

Standard Chartered PLC

United Kingdom Banks and brokers 2,000.0
OeKB Austria Banks and brokers 1,941.8
Source: Thomson Financial; S&P Global Ratings Research.
European leveraged loans go from bull to bust

In Europe, the beginning of the year was characterized by a massive issuance bull run, which continued during all of January and the first half of February. But as February wore on, cases of COVID-19 increased in Europe--with the major outbreak in Italy particularly spooking investors--and by early March, the crisis had got so bad that the syndicated loan market ground to a halt.

Although secondary prices had already begun to sharply fall in the last week of February, this market tanked during the second week of March, sending indices to decade lows. Indeed, the rolling seven-day return (excluding currency) of the S&P European Leveraged Loan Index (ELLI) fell to -11.87% by March 18, its lowest-ever level--even when compared with the 2007-2008 global financial crisis, when it hit a low of -6.52% on Oct. 16, 2008.

Chart 12

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The ELLI's weighted average bid fell to 78.92 on March 24, which is the lowest since September 2009. There is still some way to go before the weighted average bid reaches the lows of the last financial crisis, however, when the measure dipped to 59.05 on Jan. 1, 2009.

The record-breaking secondary decline had a direct impact on primary markets, with the syndication market shut--thereby leaving banks long on what LCD estimates to be €18.45 billion of debt from deals underwritten in the last few months. Among the biggest underwritten transactions that was due to launch to syndication is the roughly €8 billion of drawn and €2 billion of undrawn debt backing the €17.2 billion buyout of Thyssenkrupp's elevator technology business by a consortium led by Advent, Cinven, and the RAG Foundation.

However, the overhang from underwritten deals is not as high as in 2008 following the collapse of Lehman Brothers amid the financial crisis, when more than €32 billion of senior and mezzanine deals were hung. Banks' balance sheets are also significantly stronger nowadays, meaning they are in a better position to support corporations with further liquidity lines. Bankers say such help is likely to be the focus of the coming quarter rather than new deals, given the slowdown in acquisition activity.

Chart 13

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Before the market shutdown, February's €8.1 billion volume tally, along with just €150 million syndicated in March, brought the first-quarter volume to €25.5 billion. This is the highest quarterly tally since the second quarter of 2018, despite the paltry March showing.

Chart 14

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For the first quarter, the average yield to maturity for euro-denominated 'B' rated term loan Bs tightened to 3.84%, from 4.04% in fourth-quarter 1019, driven by tight pricing across a huge volume of deals in January and early February. This is the tightest average yield since third-quarter 2017.

This pricing environment brought a surge of repricings in the first half of the quarter, with €14.72 billion before the market shutdown in March--the highest level since fourth-quarter 2017.

Chart 15

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However, repricings, as well as the very high new-issue volume in January--with €17.2 billion of leveraged loans syndicated in the busiest month since March 2017--now seems like a world away.

"The volatility means it is impossible for sponsors to value equity at the moment. This is not a market for LBOs (leveraged buyouts)," said one banker at a major global underwriter. Given the fluidity of the situation, no one is willing to predict when the market will reopen, though few expect any meaningful acquisition related 'B' rated activity before September.

Structured finance issuance significantly declined in Europe

The outset of 2020 for structured finance issuance in Europe saw securitization issuance levels rising for two months as the market adjusted to the European Union's Securitization Regulations implemented at the outset of 2019. The deceleration in issuance levels in the third month of 2020 in light of reactions to COVID-19 was present in Europe as well. In the first quarter of 2020, Europe released $88 billion in new issue securitization volume, a 20% decrease from the first quarter of the year prior. Increases in the issuance of RMBS and CMBS originations were offset by decreases in ABS and structured credit issuances.

Chart 16

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The structured credit sector in Europe was already expected to deteriorate in overall volume before the pandemic. In the first quarter of 2020, there was $4.9 billion in new structured credit originations, down 50% compared with the first quarter of the prior year. The impact on future CLO issuance throughout 2020 due to COVID-19 is weighted toward the downside. Currently, there is evidence of a significant drop in CLO demand, as made evident by widening spreads, even at the 'AAA' rated CLO level. Additionally, deals are backed by high-yield corporate credit, which may be the most-affected financial market.

ABS issuance contracted to $5.1 billion in the first quarter of 2020, down 12% from the same period in 2019. While issuance levels for ABS were also expected to be depressed before the pandemic, the sector is also the one that will be least likely to face severity in downtown of overall issuance because many ABS subsectors will likely be the first to see an uptick in demand and they are also partially supported by quantitative easing.

The European RMBS market came in with a strong first quarter for 2020 at $21 billion, up significantly from the historic low in the first quarter of year prior and also the highest level for any first quarter since 2011. The sector also benefitted from the market adjustments to simple, transparent, and standardized. We expect new originations from RMBS to decline overall by year-end. As more than half of European RMBS is bank-originated, there will be a negative supply effect in light of relaunched central bank funding options. Subsequently, the portion of nonbank issuance that is backed by more esoteric collateral is unlikely to return while spreads remain dislocated, especially as they are often backed by lower quality collateral. However, some there exists scope for retained transactions to act as central bank collateral.

The CMBS sector in Europe saw $1.2 billion in new issue volume in the first quarter of 2020, compared to no volume in in the first quarter of 2019. The first quarter actually marked one of the highest totals for European CMBS since 2013. Looking ahead to the rest of 2020, just as in the U.S., supply is always subject to volatility based on the relative economics of CMBS versus other forms of real estate debt funding. Therefore, the relative effect of current volatility across financial markets on CMBS is hard to predict.

In terms of covered bonds, there were just $55 billion in issuance in the first quarter of 2020, a decline of 41% from the same period in 2019, further marking the lowest volume for any first quarter since before 2012. Covered bond issuance in 2020 should be only moderately affected by COVID-19, as most are largely 'AAA' rated and are a safe haven asset class, equating to relatively unmoved demand. Still, there is potential for a negative supply effect from expanded central bank funding programs, but this is likely counteracted by some investor-placed issuance being substituted with retained issuance.

Emerging Markets Spreads Get Some Relief, But High-Yield Issuance Remains Absent

Social distancing and extended lockdowns continue to deepen the shock for emerging markets. Quantitative easing programs by the Federal Reserve and ECB have helped ease the extreme risk aversion and indiscriminate sale of risky assets last month. Risk premia for emerging markets have tightened in the secondary markets, though they largely remain above the median levels during the global financial crisis. The directional change does reflect some semblance of investor confidence in riskier assets as investors are able to further differentiate risk, though this will likely take time, given the ongoing pandemic, drastic economic slowdown, and freshly renewed downturn in oil prices.

High-yield issuance in emerging markets remain shut, with no issuance since mid-February when Russian food retailer Magnit PJSC came to market with a three-year, 6.2% senior note offering (rated 'BB'). Lower (or at least not rising) interest rates in developed economies should help put the brakes on their currencies appreciating, which should benefit local financing conditions and stimulate bond issuance.

Chart 17

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Until this week, most emerging markets saw issuance lag thus far in 2020 on a year-to-date basis compared with 2019, though most markets have now inched past last year's levels. However, that at this point last year, issuance in emerging markets was dragging after renewed trade tensions between the U.S. and China escalated, effectively shutting down the high-yield market in December and causing a slow start to the year, despite a marked increase in debt issuance across emerging markets to a record $1.5 trillion in 2019 by year-end.

Looking ahead, financials should see opportunities for issuance in emerging markets in 2020, largely owing to the various central bank backstops, liquidity injections, and support of banking systems globally to mitigate the adverse consequences of social distancing measures intended to minimize the cost of public health and human life due to COVID-19. Nonfinancials will likely see some issuance to help cushion the blow and replenish revolvers and other instruments used to continue necessary operations despite a sharp decline in revenues and take some advantage of continued "lower for longer" interest rates when risk aversion eventually subsides. However, it is also highly likely that reduced economic demand will stall capital needs in 2020 and possibly longer. This will invariably drag issuance demand, and subsequently volumes, as well.

Chart 18

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International Public Finance Also Declined

Bond issuance from the international public finance sector was down 12% in the first quarter relative to the same period in 2019. After showing gains through January and February, the March total of $52 billion fell well short of the March 2019 total of $106.7 billion. That said, issuance has increased in the first three weeks of April, pushing the year-to-date total up 4%-5%. This recent spate of issuance has been broad-based across multiple continents and countries.

Data on non-U.S. public finance volume are not reliable for determining the true size of borrowing, but the numbers can suggest major trends. The past four years have recorded the highest volume ever in international public finance, averaging over $627 billion annually.

Other Global Structured Finance

The first quarter of 2020 saw $58 billion in new issue volume come out of global structured finance, marking a 58% increase over the first quarter of the previous year. Most of the growth emanated from noncovered bond securitizations out of Japan, which increased to $19 billion in the first quarter, compared with $15 billion a year ago. Australia, which is a smaller market in terms of dollar volume, saw first-quarter issuance fall to $4 billion, compared with $6 billion a year ago. Originations in Canada in the first quarter were relatively unchanged at $3 billion. Looking ahead for the rest of 2020, Japan's already pressured RMBS market will likely see further deterioration in new issue volume. We expect Japanese ABS to decline as well, but not to the scale of RMBS. Australia specifically is dominated by an RMBS market, which will face liquidity stress coupled with an upswing in borrowers unable to meet scheduled loan repayments, affecting cash flow to Aussie RMBS transactions. Policy measures have been announced to offset a rising financial downturn.

Related Research

  • Credit Pressures Rise As Recession Deepens, Recovery Path Remains Uncertain, Report Says, April 22, 2020
  • Europe Braces For A Deeper Recession In 2020, April 20, 2020
  • Economic Recovery From The COVID-19 Pandemic Will Be Uneven Across Latin America, April 17, 2020
  • Up Next: The Complicated Transition From COVID-19 Lockdown, April 16, 2020
  • COVID-19 Deals A Larger, Longer Hit To Global GDP, April 16, 2020
  • An Already Historic U.S. Downturn Now Looks Even Worse, April 16, 2020
  • European Refinancing--€3.6 Trillion Of Rated Corporate Debt Is Scheduled To Mature Through 2024, March 5, 2020
  • U.S. Refinancing--$4.8 Trillion Of Rated Corporate Debt Is Scheduled To Mature Through 2024, Feb. 27, 2020
  • Global Refinancing—Rated Corporate Debt Due Through 2024 Nears $11 Trillion, Feb. 3, 2020

This report does not constitute a rating action.

Ratings Research:Nick W Kraemer, FRM, New York (1) 212-438-1698;
nick.kraemer@spglobal.com
Sudeep K Kesh, New York (1) 212-438-7982;
sudeep.kesh@spglobal.com
Zev R Gurwitz, New York (1) 212-438-7128;
zev.gurwitz@spglobal.com
Kirsten R Mccabe, New York + 1 (212) 438 3196;
kirsten.mccabe@spglobal.com
Jon Palmer, CFA, New York;
jon.palmer@spglobal.com
Leveraged Commentary & Data:Taron Wade, Director, London (44) 20-7176-3661;
Taron.Wade@spglobal.com

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