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Credit Trends: Global Financing Conditions: Bond Issuance Is Expected To Finish 2020 Up 16% And Decline In 2021


Default, Transition, and Recovery: The European Speculative-Grade Corporate Default Rate Could Reach 8% By September 2021


Default, Transition, and Recovery: 2019 Annual Emerging Markets Corporate Default And Rating Transition Study


Default, Transition, and Recovery: Default Rates Continue To Climb As Weakest Links Remain Elevated


Default, Transition, and Recovery: The U.S. Speculative-Grade Corporate Default Rate Could Rise To 9% By September 2021

Credit Trends: Global Financing Conditions: Bond Issuance Is Expected To Finish 2020 Up 16% And Decline In 2021

Chart 1


Table 1

Global Issuance Summary And Forecast (Bil. $)
Industrials§ Financial services Structured finance† U.S. public finance International public finance Annual total
2010 1,285.5 1,485.6 895.0 433.3 306.9 4,406.4
2011 1,338.2 1,332.8 942.4 287.7 336.3 4,237.4
2012 1,776.4 1,564.6 786.1 379.6 339.1 4,845.9
2013 1,908.9 1,500.9 803.5 334.1 316.2 4,866.1
2014 2,070.9 2,012.9 905.3 339.0 339.8 5,668.0
2015 2,022.2 1,753.7 905.0 397.7 446.0 5,524.5
2016 2,257.6 1,930.2 807.6 444.8 739.3 6,179.5
2017 2,278.9 2,096.9 901.8 448.6 542.3 6,268.6
2018 2,025.3 1,986.6 1,062.0 338.9 481.1 5,893.9
2019 2,443.0 2,224.9 1,159.0 421.7 764.6 7,013.2
2019* 1,897.2 1,741.2 826.7 280.5 660.5 5,406.1
2020* 2,709.9 2,025.9 660.0 341.8 924.0 6,661.7
2020 full-year forecast, % change year over year 30 13 (20) 2 40 16
2021 full-year forecast, % change year over year (9) 5 (6) (1) (7) (3)
2021 ranges (%) (20)-0 0-9 (10)-(2) (9)-12 (15)-0 (11)-3
*Through Sept. 30. §Includes infrastructure. †Structured finance excludes transactions that were fully retained by the originator, domestically rated Chinese issuance, and CLO resets and refinancings. Sources: Refinitiv, Green Street Advisors, and S&P Global Ratings Research.

The Foggy Path Ahead

Issuance growth in 2020 has proceeded in atypical ways, as we noted in our last report.  Normally, issuance and GDP are positively correlated: As GDP rises (or falls), so does bond issuance. In fact, using the U.S. as an example, quarterly GDP and nonfinancial corporate bond issuance since 1990 have had a correlation coefficient of 0.89 (using the natural log form of each). However, since the second quarter, these two series have moved in opposite directions, and also at historically large magnitudes (see chart 2). One explanation for the recent increase in issuance has been the significant liquidity support central banks have provided. This has enabled many companies to take prudent actions to shore up cash amid high uncertainty and the lack of an effective and widespread vaccine for COVID-19. Given these factors, we think it could take some time for the typically positive GDP-to-issuance relationship to reestablish itself.

Chart 2


Our economists are, for the most part, projecting increases in the growth rates of GDP in nearly all regions in 2021 (see "A Double-Digit Rebound Has Begun, But It’s No Time To Celebrate," Oct. 6, 2020). However, it's likely to take at least until the end of 2021 for most regions' GDP to reach their year-end 2019 levels. All else aside, this would normally indicate lower issuance given the lower levels of GDP relative to the start of this year.

Despite the experience so far this year, it is very unlikely that the GDP-to-issuance relationship has been permanently reversed.  Emergency monetary and fiscal support has helped spur unprecedented bond issuance this year by restoring market liquidity and confidence. Most of the world also largely benefited from falling infection rates over the summer, while economic activity has come back at a faster pace than initially expected. That favorable mix of events may give way to second waves of infections this fall or winter, which is believed to already be happening in Europe. The U.S. is also showing signs of increased infection rates recently. This will likely be met with a resumption of some social distancing measures and a resultant drag on economic growth. This could lead to the question of whether central banks will expand, lengthen, or modify their existing liquidity supports to help keep economies on track. Even if they do, it is less likely that markets will respond as rapidly or to the same extent as they have thus far. This could lead to tighter financing conditions.

By many measures, it's hard to see how much more financing conditions can improve in certain places.  Despite only being in the first quarter out of the COVID-19-induced recession, borrowing costs in the third quarter were, on average, lower for most issuers than in the fourth quarter of 2019--itself a benign lending environment. Yields for new bond issues have fallen most for investment-grade deals, with U.S. 'BBB' nonfinancial debt facing historically low yields--roughly at the same level as 'AA' nonfinancial bonds faced in the latter part of 2019 (see chart 3). September saw some of the lowest monthly average yields to maturity on new corporate deals (including financial services) for several rating categories in the U.S.: 'AA' (0.76%), 'A' (1.6%), 'BBB' (2.37%), and 'B' (5.9%).

Chart 3


The same trend generally held true for Europe in the third quarter, though yields there were already quite low, especially on investment-grade debt (see chart 4).

Chart 4


On top of lower yields, most issuers have been able to extend their maturity lengths at the same time.  This is certainly true for investment-grade U.S. and European corporations in 2020 (see chart 5). In fact, for some, investment-grade maturity lengths on new bonds are at all-time highs.

Chart 5


However, the funding mix for the speculative-grade segment has shifted this year to reflect a greater reliance on bonds than leveraged loans. Normally, leveraged loans are about 70% of the combined total, but in 2020, speculative-grade bonds have nearly reached parity with leveraged loans. And bonds normally carry longer maturity lengths, so looking at the speculative-grade population holistically, its maturity lengths have lengthened this year as well.

Despite a likely drop-off in issuance in 2021, the stage is set for increased debt issuance in the years ahead.  Benchmark government yields--particularly in developed countries--are either close to zero, or in negative territory (see chart 6). This means that even if spreads remain at their current levels, they mask the lower cost of debt that prevails for most issuers. Core European countries have also had their government bond yields at or below zero for several years, potentially showing that lower rates may stay in place for a protracted period, making debt issuance attractive.

Chart 6


More telling, forward-looking inflation expectations indicate that central banks are unlikely to raise policy rates any time soon (see chart 7).  Five-year inflation expectations in Europe and the U.S. have been below the implicit 2% target for the better part of the last five years. Additionally, after recent statements by Federal Reserve Chair Jerome Powell, this 2% target may be raised in the U.S., widening the gap further. This is in line with our economists' view that central bank policy rates will remain at current levels through 2024.

Chart 7


Nonetheless, the road ahead has many stressors and possible unknowns.  In the near term, the U.S. general election could produce a close result, and with many mailing in their votes, a final result may not be known right away. There is also a high likelihood that any close result may be met with legal challenges, which may take some time to resolve, likely causing a bout of market volatility, which could keep borrowers and lenders away from debt markets for a time. Further, it's possible that there will be no fiscal stimulus until after the election, despite the growing need for it.

Globally, the release and widespread distribution of a COVID-19 vaccine are still some time away, and with winter approaching in the northern hemisphere, the odds of future waves of infection will rise. Trade tensions between the U.S. and China are likely to come to the fore again, as well as the Brexit process and deadline.

Issuance Projections

Because of these factors and their unknown timelines and possible interactions, we have widened the usual ranges around our forecasts for issuance next year.

We expect global bond issuance to finish 2020 up 16% relative to 2019.  This would be one of the largest annual increases in bond issuance ever (see chart 1), and has largely been fueled by exceptional growth in corporate nonfinancials from the U.S. and, to some extent, in Europe. International public finance has also had profound growth, led by China, but with most developed economies seeing much higher growth rates as well. With such a high growth rate, and one largely attributable to aggressive fiscal and monetary actions, it is unlikely bond issuance will expand in 2021.

We expect global bond issuance to contract roughly 3% in 2021.  Sluggish economic growth across most regions, combined with difficult comparisons with this year, alongside a very uncertain backdrop in 2021 will likely return bond issuance to its pre-2020 long-term growth rate of roughly 5%. This would put 2021's total slightly above 2019 in our base case.

We expect nonfinancial issuance to expand 30% this year, followed by a contraction in 2021, which could be negligible, or up to 20%.  Global nonfinancials continue to see unprecedented issuance growth this year, with issuance up nearly 61% through midyear, but this has moderated to a still substantial 43%. Ultimately, we expect this pace to slow a bit in the fourth quarter, since many issuers have come to market already to shore up cash or refinance debt ahead of year-end.

The extent to which issuers have fully tapped the market remains to be seen, though we estimate that much of the debt issued thus far in 2020 is being stored as cash, particularly for investment-grade companies in the U.S. and Europe. The second and third quarters also saw record high-yield issuance, with much of that used for debt refinancing, particularly in the prior three months.

Still, financing conditions and market appetite remain quite favorable, allowing some issuers to address their full debt structure by issuing new debt at longer maturities and lower coupons to pre-pay existing obligations. We estimate there are several large issuers that have yet to come to market in 2020, which may offer some upside, but this is not in our base-case assumption. There is some evidence to suggest issuers have paid down their near-term debt at a slightly faster rate than is typical in the U.S. during the third quarter, which could lower refinancing needs in 2021 (see chart 8). That said, this has built up a larger amount of debt coming due in the years ahead, particularly in 2023-2025.

Chart 8


We still expect Chinese issuance to increase in 2021 as overall financing conditions should remain favorable for nonfinancial corporates, though average yields have been rising from their low points in the second quarter. There's also a very large potential refinancing pipeline. Roughly $1.2 trillion of bonds have been issued that are coming due in 2021-2023, and the stock of outstanding corporate debt there has been rising by about 14% annually in the last few years.

As mentioned, many uncertainties persist, which could affect the ultimate total next year by a large margin.

Financial Issuance Could Rise By Roughly 13% This Year And Grow In 2021

Although not as extreme as the growth rates in nonfinancial corporates, global financial services has also seen a boost to issuance in 2020. Similar to nonfinancial entities, we expect this pace to slow in the fourth quarter.

Excess reserves U.S. banks hold with the Fed have increased substantially in 2020, and this tends to be a leading indicator of bank issuance. U.S. financial services companies reached nearly $500 billion in issuance this year, which was generally the same pace as the increase in excess reserves. If reserves decline--which appears to have already begun--bond issuance could fall as well.

In Europe, the European Central Bank's (ECB) third round of targeted longer-term refinancing operations (TLTROs) of €1.17 trillion, and with rates well below zero, could offer an alternative to the bond market for the region's banks. Conversely, more standard, unsecured debt could see a bump as a substitute for falling covered bond issuance recently.

The potential for increased market volatility leading into next year remains high, which has historically had a negative impact on financial services issuance. That said, if a vaccine indeed becomes available by midyear, the second half of the year could see markets calm.

Issuance growth from China has been very strong in recent years, and 2020 appears to be no exception (up 33% through the third quarter). A healthy refinancing pipeline exists here too, with over $1.1 trillion of bonds due 2021-2023, which should support issuance in 2021.

Global Structured Finance Issuance Is Likely To Decline About 20% In 2020, And Another 6% Dip Is Expected In 2021

Amid the global pandemic, structured finance has suffered the most significant deterioration in issuance volume across fixed-income asset classes--falling 20% to $660 billion. The third quarter revealed mixed issuance trends across regions as various central bank schemes played out. We now expect the global full-year total for structured finance issuance to contact around 20% in 2020.

In the U.S., we expect the asset-backed securities (ABS) sector to decline moderately through the end of 2020, and similarly with the residential mortgage-backed securities (RMBS) sector. The implementation of the Term Asset-Backed Securities Loan Facility (TALF) is expected to have a relatively muted effect on issuance growth given diminishing demand for short-term assets. The commercial mortgage-backed securities (CMBS) sector will likely be the most negatively affected in 2020. Deteriorating consumer fundamentals, punctuated by a record-high unemployment rate, along with social distancing measures, have had a particularly harsh impact on brick-and-mortar retailers, restaurants, hotels, and gaming operations. We also expect the U.S. structured credit sector to decline substantially by the end of 2020 as managers continue to search for attractive underlying collateral pools amid this year's decline in leveraged loan issuance.

Structured finance issuance in the U.S. in 2021 could contract by a more modest amount than in 2020. Mass migrations to the suburbs brought on by the pandemic have led to a rise in single-family home sales, which is expected to persist in the first half of 2021, supporting underlying collateral for RMBS volume.

Conversely, as social distancing measures remain in place and uncertainty surrounding the timeline of a vaccine for the virus continues, CMBS volume can be expected to deteriorate further, as people stay away from commercial spaces. Some pent up-demand in the consumer space, supported by rising vehicle sales, and consistent demand for student loans should support originations in the ABS sector in the first half of 2021. However, as stimulus measures run out and more Americans become unemployed, we could easily see this reverse course as the year progresses, with diminishing supply to ABS originations.

We expect U.S. collateralized loan obligation (CLO) issuance to continue to be plagued by deteriorating issuer diversification and fundamentals in underlying broadly syndicated loans.

In Europe, we expect structured finance conditions to continue to deteriorate for the remainder of 2020. Overall new issue volume fell 16% in the first three quarters of 2020, largely a result of flagging covered bond issuance.

In 2021, we expect structured finance volume out of Europe to continue to decline, but to a lesser extent than in 2020, as our economists expect further deterioration in key indicators. We expect securitization to suffer in some of the leading sectors as unfavorable conditions persist, particularly for consumers. Covered bonds are expected to continue to decline in light of issuers' renewed access to competitively priced central bank funding and reductions in mortgage loan origination volumes.

Outside the U.S. and Europe, structured finance issuance has declined 21% year over year, which we expect will continue through year-end. This mainly comes down to volumes in Japan and Australia. Japan has largely seen similar volumes to 2019, though Australia sustained a 43% drop in structured finance issuance in the first three quarters of 2020. Some positivity resulted after the Australian Central Bank cut interest rates to 0.25% and launched an unlimited quantitative easing program.

Originations outside the U.S. and Europe are set to decline in 2021, though brighter issuance prospects lie ahead in Australia on the back of central bank support and narrowing spreads. However, in Japan, deteriorating consumer fundamentals will lead to declining levels of auto and home loans, which are the main form of collateral for Japan securitizations.

U.S. Public Finance Issuance Is Set To Increase Marginally In 2020 And Remain Roughly Unchanged In 2021, But With Much Larger Variations Possible

We forecast that issuance for 2020 as a whole will come in around $430 billion, or about a 2% increase from 2019, followed by a slight decline in 2021. This sector faces heightened uncertainty around the federal response to the pandemic, with the prospects of a new relief package passing Congress changing by the day. Some states and localities will be very vulnerable to a second virus wave given already weak tax revenue and potentially accelerating economic contractions. This sector's investor base is also heavily retail, potentially adding to near-term stress if market volatility increases. We expect 2021 issuance could be anywhere between a drop of 9% and an increase as high as 12%.

International Public Finance Is Likely To Be A Breakout Sector In 2020 And Face A Correction In 2021

International public finance volume continued to expand at a heady pace in the third quarter, bringing our full-year 2020 estimate up to roughly a 40% growth rate. With the need for fiscal support still strong in many regions, we expect reliance on the public sector and banking systems to continue next year, leading to a still strong annual total. Although, it will likely see a decline of around the high single digits from what will likely be new territory for this sector: reaching over $1 trillion in new issuance in 2020. As with many sectors, the need for issuance may persist if the pandemic produces secondary waves of infection, though this could be offset should a vaccine become available. If immediate funding needs wane, a weaker pipeline of maturing debt might also suppress issuance totals relative to this year.

Third-Quarter Summary

Global new bond issuance through the third quarter of 2020 totaled $6.8 trillion, up 23.4% relative to the same period in 2019. Most sectors saw tremendous increases, led by industrials (up 42.8%), with international public finance a close second (up 40%). U.S. public finance increased 22%, and financial services by 16.4%. Standing in contrast, global structured finance issuance declined 19% in the year to date, as the global recession weighed heavily on real estate-related sectors, and leveraged loans continue their decline, resulting in lower CLO issuance.

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 issues rated by S&P Global Ratings.

U.S. Financing Conditions Are Especially Favorable

With the economy slowly pulling its way out of the worst recession in decades, financing conditions in the U.S. have become particularly favorable for lenders (see table 2). Market volatility could increase as we head into the general election next month--which has the potential for either no clear winner early on due to a large amount of mail-in ballots this year, or to have contested results that could drag on for weeks. This could become an acute stressor for markets if no additional rounds of fiscal stimulus are passed before the election. That said, any volatility or reactive deterioration of financing conditions would be relative to the third quarter, which saw some of the most favorable conditions ever.

Borrowing costs have fallen across nearly all sectors and all levels of credit quality. Once volatile commercial paper yields have returned to near zero, and the 10-year Treasury yield has been at its lowest point in history--remaining below 1%. Among corporate entities, many rating categories reached their lowest monthly average yield to maturity in September, with even the 'B' category coming in at an all-time low of 5.9%.

In our opinion, financing conditions are broadly favorable in the U.S., and at this time we have only one indicator classified as "restrictive"--the latest Fed survey of senior loan officers (see table 2). However, as of this writing, the most recent survey is from the second quarter, which was the peak of the economic downturn. Unsurprisingly, lending standards on commercial and industrial (C&I) loans saw some of their worst tightening in history. But given the improvement in other borrowing costs and lending conditions (such as longer maturities on new debt), we expect the third quarter survey to show a marked improvement for C&I loans as well.

Table 2

Indicators Of Financing Conditions: U.S.
Restrictive Neutral Supportive 2020 2019 2018
M1 money supply, % change, YoY x 40.4 6.1 3.7
M2 money supply, % change, YoY x 23.6 6.0 3.7
Tri-party repo market - size of collateral base (bil. $)§ x 2,222.0 2,446.1 2,030.7
Bank reserve balances maintained with Federal Reserve (bil. $) x 2,854.7 1,397.1 1,856.2
Three-month nonfinancial commercial paper yields (%) x 0.11 1.90 2.23
Three-month financial commercial paper yields (%) x 0.14 1.97 2.33
10-year Treasury yields (%) x 0.69 1.68 3.05
Yield curve (10-year minus three-month) (bps) x 59 (20) 86
Yield-to-maturity of new corporate issues rated 'BBB' (%) x 2.37 3.11 4.52
Yield-to-maturity of new corporate issues rated 'B' (%) x 5.92 6.81 7.71
10-year 'BBB' rated secondary market industrial yields (%) x 2.56 3.49 4.61
Five-year 'B' rated secondary market industrial yields (%) x 8.04 7.15 6.77
10-year investment-grade corporate spreads (bps) x 153.1 139.8 130.9
Five-year speculative-grade corporate spreads (bps) x 576.9 434.1 300.6
Underpriced speculative-grade corporate bond tranches, 12-month average (%) x 9.6 14.2 19.0
Fed Lending Survey For Large And Medium Sized Firms* x 71.2 (2.8) (15.9)
S&P Global corporate bond distress ratio (%) x 9.5 7.6 5.7
S&P LSTA Index distress ratio (%) x 8.2 5.0 2.1
New-issue first-lien covenant-lite loan volume (% of total, rolling three-month average) x 80.9 88.0 88.7
New-issue first-lien spreads (pro rata) x 281.6 343.2 319.8
New-issue first-lien spreads (institutional) x 408.8 396.4 377.3
S&P 500 Market capitalization, % change, YoY x 12.8 0.5 13.9
Interest burden (%)§ x 8.6 7.7 8.6
Note: Data through Sept. 30. *Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices For Large And Medium-Sized Firms; through second-quarter 2020. §As of June 30, 2020. Sources: Economics & Country Risk from IHS Markit; Federal Reserve Bank of New York; LCD, an offering of S&P Global Market Intelligence; and S&P Global Ratings Research.
U.S. corporate issuance surpasses annual record in just three quarters

After extraordinary monetary policy from the Federal Reserve revived primary market activity in late March, companies that face immense uncertainty raced to secure financing while it was available. Record quarterly issuance of $682.4 billion in the second quarter was followed by $374.1 billion in the third quarter, pushing issuance for the year to $1.5 trillion. With three months remaining in the year, total issuance through the third quarter is already 15% higher than the previous annual record set in 2017. Monthly issuance for the year likely peaked in April and May, with $276.2 and $247.2 billion respectively, but after a slow start in July, issuance in the third quarter remained strong historically.

Investment-grade corporate issuance in the third quarter totaled $275.9 billion. After the record-setting second quarter, issuance dropped off in July ($49.8 billion) but picked up again in August and September ($122.8 billion and $103.3 billion, respectively). Total issuance for the year is already $1.2 trillion, 15% higher than the previous annual record set in 2017.

Speculative-grade issuance in the third quarter totaled $98.2 billion. After its own record-setting second quarter, issuance also dropped off in July ($20.1 billion) before picking up again in August and September ($42.6 billion and $35.5 billion, respectively). Even though over three-fifths of speculative-grade issuance this year has been in the 'BB' category, issuance in the weaker rating categories in both the second and third quarters was strong historically. Total issuance for the year is $273.5 billion, just 6% below the previous record set in 2012.

Nonfinancial corporate rated bond issuance totaled $269.1 billion in the third quarter, 25% higher than a year ago. Issuance in the high technology, consumer products, and health care sectors accounted for nearly two-fifths of all nonfinancial issuance, with $38.2 billion, $29.3 billion, and $29.2 billion, respectively. Financial corporate rated bond issuance totaled $105 billion in the third quarter, 15% higher than a year ago.

Chart 9


AT&T Inc. and Alphabet Inc. topped the list of issuers in the third quarter (see table 3). AT&T issued a five-part senior unsecured note offering on July 27 that totaled $11 billion. Proceeds are expected to pay down debt maturing in 2021-2025. Alphabet issued a six-part senior unsecured note offering on Aug. 3 that totaled $10 billion. Some of the proceeds are expected to fund sustainability projects and the remainder used for general purposes.

Table 3

Largest U.S. Corporate Bond Issuers: Third-Quarter 2020
Issuer Sector Mil. $

AT&T Inc.

Telecommunications 10,989.2

Alphabet Inc.

High technology 9,940.6

Johnson & Johnson

Health care 7,468.9

Gilead Sciences Inc.

Health care 7,233.0

Coca-Cola Co.

Consumer products 7,149.8

Bank of America Corp.

Banks and brokers 6,823.4

Intercontinental Exchange Inc.

Financial institutions 6,468.7

Nutrition & Biosciences Inc.

Consumer products 6,449.8

Delta Air Lines Inc.

Transportation 6,000.0

Royalty Pharma Plc

Banks and brokers 5,851.0

Apple Inc.

High technology 5,471.9
BAT Capital Corp Financial institutions 4,750.0

Comcast Corp.

Media and entertainment 4,471.0

T-Mobile US Inc.

Telecommunications 4,035.8

Chevron USA Inc.

Oil and gas 4,000.0
Note: Includes issuance from Bermuda and the Cayman Islands. Sources: Refinitiv and S&P Global Ratings Research.
Institutional leveraged loans rebound after sparse activity in the second quarter

Issuance in the U.S. leveraged loan market rebounded in the third quarter, as stabilizing conditions and increasing investor demand drew borrowers off the sidelines. The volume of institutional loans--the kind of loans bought by collateralized loan obligations and retail loan funds--rose to $73.8 billion in the third quarter, from a four-year low of $44.5 billion in the second, a period stunted by volatility and uncertainty surrounding the pandemic (see chart 10).

Chart 10


Even with the quarter-over-quarter lift, total issuance remains well below what has been the norm, because of lackluster mergers and acquisitions (M&A) activity. Year-to-date institutional volume, at $207 billion through Sept. 30, is at a five-year low and is down 13% compared with the comparable period in 2019, according to LCD. Total M&A volume is down 25% from last year (see chart 11).

Chart 11


Overall M&A issuance surpassed the second-quarter amount but still lagged pre-pandemic levels, and LBOs, in particular, are running 38% lower from the comparable period last year (see chart 12). Buyouts, combined with other private equity-backed acquisition financing, did edge up slightly from the second quarter, to $18.9 billion, but overall fell well below recent quarterly averages. For example, average quarterly issuance over 2018 and 2019 was $41.4 billion. The combined total for the second and third quarters of 2020 is the lowest for two consecutive quarters since the first and second quarters of 2012.

Chart 12


As acquisition-related financing has waned, opportunistic loan issuance has taken up some of the slack. Deals supporting refinancing of debt or funding dividends (mostly to private equity owners of the borrowing entity) accounted for 48% of total issuance in the third quarter, whereas the 40% M&A share was the lowest since the fourth quarter of 2019.

On the demand side, CLO issuance was healthy in the quarter, at $23.4 billion, and the market is expected to remain busy in the months ahead due to lower liability costs and to preempt potential volatility around the U.S. elections (see chart 13). Loan investors also saw roughly $38 billion of repayments during the quarter. Cash flows at retail loan funds were slightly negative, by contrast. Although outflows from loan mutual funds and exchange-traded funds persisted over the summer--totaling $2.2 billion in the quarter through Sept. 22, according to Lipper--they were nowhere near the mass exodus in March. As with other risk asset classes, the loan market staged a recovery after the pandemic-induced cratering in the second quarter, and by September, the market had righted itself to the point that the total return of the S&P/LSTA Leveraged Loan Index for 2020 briefly turned positive.

Chart 13


As evidence of the supportive market tone, price flex activity--in which pricing on a loan is changed during syndication, depending on investor demand--was significantly skewed in favor of issuers. Third-quarter downward flexes, favoring borrowers, outnumbered upward flexes 17 to one, a sharp spike from 6.3 to 1 in the second quarter and 4.7 to 1 in the first quarter.

With that, new-issue pricing descended from the stratospheric levels amid the risk-off mood in the second quarter. The average spread over LIBOR on new institutional loans from issuers rated 'B+'/'B' fell to LIBOR plus (L+) 388 basis points (bps) at quarter-end, the lowest since February (see chart 14). The all-in spread, which includes upfront fees and any LIBOR floor benefit, dropped 112 bps from the second quarter, to 487 bps.

Chart 14


Moreover, the loan market was increasingly receptive to riskier borrowers, as 'B' issuance more than doubled in the third quarter, to $53.4 billion, or 72% of total issuance, compared with 49% in the second quarter (see chart 15).

Chart 15

U.S. public finance climbs higher

U.S. municipal bond issuance in the third quarter was $135.5 billion, up from $112 billion in the second quarter and from $107.1 billion in the third quarter of 2019. The issuance amount in the third quarter represented the third-highest quarter since at least 2011. Issuance by month in July, August, and September was $46.6 billion, $41.6 billion, and $47.3 billion, all above average for each of those months for the past 10 years.

Chart 16


Breaking out issuance into components, new money issuance has fallen as a percentage of all issuance so far this year, down to 55% through September, compared with 62% last year. Refunding has seen an increase in terms of percentages, up to 32% from 26% last year, while mixed-used issuance is up slightly, to 13% from 12%.

Chart 17


We saw more individual large issues in September than we have in the past--three issues were over $1.5 billion (see table 4). This was led by the Florida State Board Administration Financial Corp., with $3.5 billion, a California general obligation issue, worth $2.6 billion, and the New York Transportation Development Corp., with $1.5 billion.

Table 4

Largest U.S. Municipal Issues: Third-Quarter 2020
Issuer (Mil. $) Date
Florida St Board Admin Fin Corp 3,500.0 9/3/2020

Regents of the Univ of California

2,649.5 7/9/2020


2,631.0 9/2/2020

NYS Urban Development Corp

2,297.5 7/17/2020

NYC Transitional Finance Auth

1,623.5 8/19/2020

New York Transportation Dev Corp

1,511.0 9/1/2020

New York City

1,388.1 8/26/2020

Los Angeles Co Metro Trans Auth

1,356.1 8/11/2020

California State Univ Trustees

1,308.6 8/26/2020

Texas Transportation Commission

1,270.7 7/15/2020
Sources: Refinitiv and S&P Global Ratings Research.

For the year to date, California has issued the most debt, with $51.5 billion so far, up 18.6% compared with this time last year. New York is second, with $44.9 billion, up 45.6% compared with this time last year (see table 5).

Table 5

Top 10 States By Bond Sales (September 2020)
--2020-- --2019--
State Rank Volume (mil.) September volume (mil.) Rank Volume (mil.) Change from previous year (%)


1 51,538.6 8,695.6 1 43,444.9 +0.2

New York

2 44,885.8 7,193.4 2 30,835.3 +0.5


3 39,323.2 8,116.7 3 27,419.1 +0.4


4 15,727.5 5,919.9 4 14,477.3 +0.1


5 15,549.8 2,834.3 8 7,514.8 +1.1


6 14,168.5 893.4 5 12,269.6 +0.2


7 10,832.5 675.5 6 10,218.0 +0.1

State of Ohio

8 9,909.4 1,573.8 11 6,592.7 +0.5

New Jersey

9 8,873.7 883.8 10 6,673.9 +0.3


10 8,205.9 1,288.8 13 6,391.3 +0.3
Sources: Refinitiv and S&P Global Ratings Research.
U.S. structured finance issuance receives jolt from stimulus in the third quarter

After falling in response to the initial outbreak of the coronavirus in the U.S. in March, issuance slowly picked up again at the start of May. This followed the combined stimulus through the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, the Fed cutting yields back to zero, and the reemergence of many asset purchase programs used in the global financial crisis.

Such a recipe of stimulus allowed for a diminishing gap in new origination levels in the third quarter of 2020. Structured finance volume, down 27% in the second quarter of 2020, was down just 20% in the third quarter. New ABS volume allotted for most of the gains, rising to $144 billion in the third quarter, almost double that of the second-quarter total of $82 billion. The credit card ABS sector remains weak, down 92%, with just $2 billion in the first three quarters of 2020. Esoteric ABS, which consists of more niche collateral, was down over 23% in the first three quarters of the year, at $35 billion. Auto ABS was down only 7% year over year at $69 billion, compared with a decline of 12% year over year in the second quarter. Student loan ABS was the only sub-asset class to report an annual increase in the first half of the year, of 32% to $15 billion.

Chart 18


New issue CLO volume fell 35% in the third quarter of 2020, to $57 billion. In a reversal from the first half of the year, the third quarter saw monthly issuance volumes tick up. August had the largest total by volume, with $8 billion. Going into 2020, expectations for CLO issuance were negative relative to the prior year, as leveraged loan volume, a leading indicator of CLO issuance, had been steadily declining since the middle of 2018. In the three quarters of 2020, leverage loan volume fell even further, indicating lower levels of future new issue CLOs. Further, CLOs are particularly vulnerable to the impact from COVID-19 because of the underlying loans containing speculative-grade corporate debt.

The RMBS sector reported $67 billion in new issue volume for the third quarter of 2020, down just 12% year over year. Further, like ABS, the sector in the third quarter alone almost doubled the entire total origination recorded in the first half of 2020. The sector suffered an immediate drop-off in issuance in April and May, with monthly totals of $2 billion. However, in June, new issuance came back to market, totaling $9 billion. In light of the coronavirus pandemic, some people have been moving from densely populated urban cities to the suburbs, facilitated by the Federal Reserve once again slashing interest rates. The third quarter revealed persistent demand for new single-family home sales. In fact, the third quarter of 2020 was one of the largest for RMBS originations over the past five years, at $25 billion.

However, the question of sustainability of demand remains as U.S. unemployment levels are still high and unemployment benefits for many Americans have run out. As home sales are a leading indicator of RMBS issuance, we expect the sector to experience hardship in the face of supply if home sales fall once again.

Following an outstanding first quarter for CMBS issuance, the sector all but came to a halt in second quarter as the social distancing measures kept Americans homebound and, thus, away from high-risk commercial areas. The third quarter of 2020 saw gains in issuance underpinned by many of the aforementioned measures being eased by both governments and individuals. However, the gain was meager and resulted in a total of $37.5 billion year to date in the third quarter.

We expect continued deterioration in new issue volume throughout the fourth quarter, given the sector's exposure to economic volatility and real estate debt funding, as well as the inability to perform site visits for all types of syndicated real estate-related debt issuance.

Financing Conditions Remain Favorable In Europe

Financing conditions in Europe remain broadly supportive from their improvement in the second quarter (see table 6). High-yield spreads continue to fall, but remain above the levels seen at the start of the year. Still, after the ECB's senior loan officer survey in the first quarter indicated expectations for lending standards on loans to corporations to ease substantially in the second quarter, lending standards tightened marginally instead. As of this writing, the third-quarter survey results aren't out, but some further easing of loan standards is possible. Related to this, the proportion of leveraged loans that are covenant-lite has reached 100% of the total issued in the last three months.

The ECB continues to provide liquidity and fiscal policy that is more cohesive than in the U.S. right now, contributing to favorable financing conditions in the region. The ECB's Pandemic Emergency Purchase Programme (PEPP) has been utilized to a greater extent than the Fed's primary and secondary corporate bond facilities, with €559 billion purchased by the ECB, out of the €1.35 trillion available. Smaller and medium-size firms have benefited from state-backed loan programs in many European countries as well, all supporting broad-based market liquidity.

Similar to the U.S., borrowing costs continue to fall for corporations among nearly all rating categories, though over fewer deals at the lower end of the speculative-grade segment. Government borrowing rates remain extremely low in Europe, with even the U.K. finding the short-end of its yield curve at, or below, zero. Many of the larger, core European countries' government yields are below zero, which has been forcing investors down the credit ladder in search of yield. If these government-backed loan programs should end--as expected in December--this may cause some deterioration in financing conditions, though the PEPP and low government yields will likely remain, keeping any uptick in yields relatively modest.

Table 6

Indicators Of Financing Conditions: Europe
Restrictive Neutral Supportive 2020 2019 2018
M1 money supply, % change, YoY* x 7.2 8.5 6.7
M2 money supply, % change, YoY* x 4.2 6.3 4.0
ECB Lending Survey of Large Companies§ x 1.23 0.74 (3.05)
Yield-to-maturity of new corporate issues rated 'A' (%) x 0.93 1.31 3.06
Yield-to-maturity of new corporate issues rated 'B' (%) x 5.71 5.30 6.92
European high-yield option-adjusted spread (%)† x 4.74 3.66 3.55
Underpriced speculative-grade corporate bond tranches, 12-month average (%) x 26.2 23.8 24.5
Major government interest rates on 10-year debt x
S&P LCD European Leveraged Loan Index distress ratio (%) x 6.75 3.65 1.81
Rolling three-month average of all new-issue spreads: RC/TLA, (Euribor +, bps) x 266.7 341.7 316.7
Rolling three-month average of all new-issue spreads: TLB/TLC, (Euribor +, bps) x 431.9 395.5 401.5
Covenant-lite institutional volume: share of institutional debt (%, rolling three-month average) x 100.0 87.0 94.3
Note: Data through Sept. 30. *Through Aug. 31. §European Central Bank Euro Area Bank Lending Survey for Large Firms, second-quarter 2020. †Federal Reserve Bank of St. Louis. Sources: Economics & Country Risk from IHS Markit; ECB; LCD, an offering of S&P Global Market Intelligence; and S&P Global Ratings Research.
Corporate bond issuance in Europe contracts in the third quarter

Quarterly corporate rated bond issuance in Europe in the third quarter fell 16% compared with a year ago to €162.1 billion (see chart 5). Monthly issuance steeply dropped after the strong second quarter but rebounded in September.

Investment-grade corporate issuance totaled €125 billion in the third quarter, 21% lower than a year ago. Strong issuance returned in September after a sharp decline in investment-grade issuance through August.

Speculative-grade issuance totaled €37.1 billion, 6% higher than a year ago. However, nearly four-fifths of speculative-grade issuance during the quarter was in the 'BB' category, with issuance in the 'B' and 'CCC/C' rating categories both weak historically.

Third-quarter nonfinancial corporate rated bond issuance fell 22% to €70.4 billion compared with a year ago. Issuance in the health care, utility, and chemicals, packaging, and environmental services sectors accounted for 40% of all nonfinancial issuance, with €12.7 billion, €8 billion, and €7.2 billion, respectively. Financial corporate rated bond issuance fell 11% to €91.7 billion from a year ago.

Chart 19


Medtronic Global Holdings SCA and Bayer AG topped the list of issuers in the third quarter (see table 7). Medtronic Global Holdings SCA issued a six-part senior unsecured note offering on Sept. 24 that totaled €6.2 billion, while Bayer AG issued a four-part senior unsecured note offering on July 1 that totaled €6 billion.

Table 7

Largest European Corporate Bond Issuers: Third-Quarter 2020
Issuer Country Sector Mil. €

Medtronic Global Holdings SCA

Luxembourg Health care 6,216.0

Bayer AG

Germany Chemicals, packaging, and environmental services 6,006.4

HSBC Holdings PLC

U.K. Banks and brokers 4,652.2


France Utility 4,646.5


Luxembourg Financial institutions 4,083.4

BNP Paribas SA

France Banks and brokers 3,634.9
Shell International Finance BV U.K. Oil and gas 3,325.5
Banco Bilbao Vizcaya Spain Banks and brokers 3,016.2

UBS Group AG

Switzerland Banks and brokers 2,858.7

State Grid Overseas Inv (2016)

British Virgin Islands(United Kingdom) Financial institutions 2,830.9

VMED O2 UK Financing I PLC

U.K. Financial institutions 2,734.8

Barclays Bank PLC

U.K. Banks and brokers 2,623.2


France Banks and brokers 2,559.2

AstraZeneca PLC

U.K. Health care 2,542.2

Danske Bank A/S

Denmark Banks and brokers 2,197.8
Sources: Refinitiv and S&P Global Ratings Research.
European leveraged loans also rebounded

In Europe, the third quarter marked an improvement, with total loan volume up to €16.2 billion, from €11.8 billion the prior quarter. Indeed, leveraged loan volume for 2020 so far looks surprisingly healthy, despite the extreme market disruption in March when the global coronavirus pandemic hit (see chart 20).

Chart 20


Much of this momentum can be attributed to the busy months of January and February. (In the first quarter, total loan volume was nearly twice as strong as that in the third quarter.) Although, the market returned much more quickly than expected after March because of strong technical liquidity factors and economic pressure being limited to specific sectors.

In the third quarter, institutional issuance supporting buyouts fell to €3.4 billion, from €4.2 billion in the second quarter and €6.87 billion in the first quarter. Other M&A-related issuance rose, however, to €2.87 billion, from €2.07 billion. This measure was still down from the first quarter, which included €5.73 billion of other M&A-related deal flow (see chart 21).

Chart 21


Recaps, refinancings, and all other issuance stayed roughly steady at €3.52 billion in the third quarter, compared with €3.80 billion in the prior quarter. This category saw a huge drop-off from first-quarter levels, however, when companies rushed to take advantage of favorable pricing conditions, completing €10.25 billion.

LCD's analysis of overall loan market technicals shows that in the last three months, the measurable side of demand (CLO issuance) at €4.59 billion exceeded net new loan supply (new issues tracked by the ELLI, minus repayments), which came in at €4.30 billion (see chart 22). This leaves a rolling-three-month supply shortage of roughly €0.3 billion. The ELLI supply/demand imbalance continues to be driven by improvements in CLO issuance, while institutional leveraged loan issuance is unable to keep pace.

Chart 22


When the COVID-19 crisis hit the leveraged finance markets, loans took the hardest blow, as institutional loan volume fell to just €10.1 billion in the second quarter, from €22.9 billion in the first quarter, and the third-quarter total came in at only €9.8 billion. Meanwhile, CLO issuance improved slightly, to €4.6 billion in the third quarter, from €4.3 billion in the second. Tightening liabilities--especially at the top of the stack--are providing a key support for new-issue CLO creation.

When it comes to pricing, both in secondary and primary markets, it appears to be in borrowers' favor. Indeed, the ELLI climbed to a weighted average bid of 94.79 on Sept. 30, which is less than four points away from its 2020 peak of 98.66, reached in January (see chart 23).

Chart 23


And although spreads and yields have widened in the European primary market since the end of the first quarter--from an average of 369.7 bps and a 3.85% yield to maturity for 'B' euro-denominated loans, to 437.5 bps and 4.85%, respectively, for the three months ended Sept. 30--yields have declined since the second quarter, from 4.94% on average (see chart 24).

Chart 24


This is due to shrinking original issue discounts (OIDs) over the quarter, as spreads have widened from 417.3 bps on average. There is also a variation in pricing dependent on credit. "There is a size and sector 'halo' effect, in that if you're not too big and in the right sector, then pre-pandemic pricing is available," commented an investor. "But if it's a bigger LBO and a new one, you have to pay a premium."

Leverage and documentation are looking borrower friendly. Total pro forma debt to EBITDA leverage for all transactions year to date in Europe has risen to 5.46x, the highest since 2007 (see chart 25). The transaction volume in 2020 has been low, however, while average leverage has been affected by the number of leveraged entities completing add-ons. Moreover, market participants say there haven't yet been enough buyout deals since the pandemic hit to see where genuine leverage levels are in the current market.

Chart 25

Securitization gains were not enough to eclipse covered bond losses

The outset of 2020 for structured finance issuance in Europe saw securitization issuance rising as the market adjusted to the EU Securitization Regulation implemented at the outset of 2019. The deceleration in issuance in March 2020 in light of reactions to COVID-19 was present in Europe as well. However, so was the rise in the third quarter. Overall European issuance is down 16% in the third quarter of 2020, mainly led by covered bonds.

Chart 26


Overall volume in the structured credit sector in Europe was already expected to decline before the pandemic. In the first three quarters of 2020, there was $23 billion in new structured credit originations, down 11%% compared with the same period of 2019.

The impact on future CLO issuance throughout 2020 due to COVID-19 is weighted to the downside. Similar to U.S. CLOs, European CLOs are adapting to the pandemic away from larger pre-COVID-19 structures with longer investment periods. Primary issuance has been coming from pre-COVID-19 warehouses, though little supply is becoming a growing concern for investors. The drop in CLO demand is further exacerbated by widening spreads, even at the 'AAA' rated CLO level. Additionally, deals are backed by speculative-grade corporate credit, which may be the most-affected financial market.

ABS issuance increased once more in the third quarter of 2020, to $32 billion, up over 36% from the first half of 2019. ABS issuance in the second quarter of 2020 totaled $27 billion year to date. Collateral in the third quarter was mostly auto and consumer loan issuance. The sector is also the least likely to face a severe downturn in overall issuance because many ABS subsectors will likely be the first to see an uptick in demand and are partially supported by quantitative easing.

The European RMBS market came in at $51 billion year to date in the third quarter of 2020. The sector started the year with a strong first quarter, at $27 billion. Issuance was half that in the second quarter, at just $13 billion, and the third quarter was even less, with just $11 billion in new volume. In the first quarter, the sector benefited from the market's adjustment to simple, transparent, and standardized.

The European RMBS market has greater exposure to increasing unemployment rates and implications of payment holiday structures across the region. However, when payment holiday compensation runs out and parts of the workforce cannot find other means of income, delinquencies are expected to rise. Because 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 since they are often backed by lower-quality collateral. However, there's some scope for retained transactions to act as central bank collateral.

Issuance in the CMBS sector in Europe was $2 billion in the first three quarters of 2020, compared with $4 billion in the same period of 2019. Looking ahead, 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. As stay-at-home orders continue to hurt the lodging and retail sectors, we expect issuance to decline throughout the year.

In terms of covered bonds, issuance totaled just $119 billion in the first three quarters of 2020, a decline of 37% from the same period last year.

China Continues To Lead Growth In Emerging Market Issuance

Similar to developing markets, financing conditions continue to slowly improve among emerging markets, for the most part. Credit spreads on corporate debt have been moving down in near lock-step with those in the U.S., but they do reflect some relative differentiation consistent with virus outbreak trends this year (see chart 27). In that, Latin America--a region where the number of cases rose later in the year than most--is still showing heightened spreads relative to other emerging market regions, such as Asia-Pacific (APAC), where the virus began and was under relative control earlier in the year.

Supportive actions by developed market central banks have helped lower the value of major currencies, such as the dollar. Dollar-denominated bond issuance among emerging markets (excluding China) has hit a historical high mark in 2020 (63% of the total), and our economists expect the dollar exchange rate to stay low through 2023 on the back of a prolonged period of near-zero policy rates. We expect financing conditions for corporations in emerging markets to remain supportive of future issuance.

Chart 27


Ultimately, China accounts for the lion's share of emerging market corporate bond issuance, and in 2020, it also accounts for the majority of the growth rate (see chart 28). Chinese corporate bond issuance is up over 25% through the first nine months of 2020, relative to 2019, leaving all other emerging markets behind. Emerging Asia (excluding China) is also up over 6%. Given that COVID-19 hit China and the general APAC region in late 2019 and was generally contained relatively early in 2020, it is not surprising their growth rates are higher than other emerging regions. As mentioned, Latin America saw virus cases spike much later than other major regions, and is showing essentially flat issuance growth this year.

Chart 28


While Chinese companies normally dominate the list of largest emerging market issuers in a given quarter, they made up the entire list during the third quarter (see table 8). Even more noticeable, this list is nearly all large Chinese banks, with the only exception being China Railway Grp Co. Issuance growth among Chinese financial services companies has been quite fast in recent years, and we expect this trend to continue as reliance on the banking sector to extend credit to businesses and consumers will be an important part of the nation's emergence from the pandemic.

Table 8

Largest Emerging Markets Corporate Bond Issuers: Third-Quarter 2020
Issuer Country Sector Mil. $

Ind & Coml Bk of China Ltd

China Banks and brokers 13,229.3

Bank of China Ltd.

China Banks and brokers 12,517.0

Bank of Communications Co. Ltd.

China Banks and brokers 11,698.5
China State Railway Grp Co China Transportation 11,607.5

Shanghai Pudong Dvlp Bk

China Banks and brokers 11,566.7

China Construction Bank Corp.

China Banks and brokers 9,516.8

China Development Bank Corp

China Banks and brokers 7,178.6

China Merchants Bank Co. Ltd.

China Banks and brokers 7,129.9

China Everbright Bank Co. Ltd.

China Banks and brokers 5,899.6

The Export-Import Bk of China

China Banks and brokers 5,834.2

China CITIC Bank Corp. Ltd.

China Banks and brokers 5,741.4

Agricultural Bank of China Ltd.

China Banks and brokers 5,062.0

CITIC Securities Co. Ltd.

China Banks and brokers 4,169.4
Central Huijin Investment Ltd China Banks and brokers 4,073.5

Agricultural Dvlp Bk Of China

China Banks and brokers 3,860.2
Sources: Refinitiv and S&P Global Ratings Research.

International Public Finance Is Ahead 40%

Bond issuance from the international public finance sector has taken off after a slow start to the year, rising to $924 billion through September. This is up from $661 billion through the first nine months of 2019. Although still dominated by Chinese issuers, this year's growth has been broad-based across continents and countries, with many developed markets posting strong totals.

Data on non-U.S. public finance volume is 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 $632 billion annually, with 2020 on pace to exceed the $1 trillion mark for the first time.

Other Global Structured Finance

Securitizations and covered bonds outside the U.S. and Europe totaled $127 billion in the first three quarters of 2020, a 21% decline from the same period in 2019. Covered bonds are now down 5% year over year at $38 billion, despite maintaining a gain over 2019 for most of the year. Securitizations have taken a hard hit, down 26% year-over year in the third quarter to $89 billion, still above pre-2019 levels.

Securitizations declined 43% year over year in Australia, 40% in Canada, and 54% in Latin America. Covered bond issuance in Canada is now down 20%, Australian covered bond issuance is down 20% as well, and Japan issued no covered bonds. Japan has been the best performer outside the U.S. and Europe, with a third-quarter securitization total of $46 billion, equal to the $46 billion issued in the same period last year.

Related Research

This report does not constitute a rating action.

Ratings Performance Analytics:Nick W Kraemer, FRM, New York (1) 212-438-1698;
Zev R Gurwitz, New York (1) 212-438-7128;
Kirsten R Mccabe, New York + 1 (212) 438 3196;
Jon Palmer, CFA, New York;
Director, LCD:Taron Wade, London (44) 20-7176-3661;
Contributor:Sudeep K Kesh, Credit Markets Research, New York (1) 212-438-7982;

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