Increased volatility and rising interest rates are making companies more hesitant to issue new debt in 2022.
Global bond issuance is forecast to decline 4.9% in 2022 from the previous year, with debt issued by nonfinancial companies on track to fall by 12% from 2021, according to S&P Global Ratings. Rising interest rates make it more expensive to raise debt and many companies are still flush with capital after tapping markets in response to the pandemic.
Issuers are proving more reluctant to raise debt as the U.S. Federal Reserve moves to control inflation by raising the federal funds rate and central banks in other countries also grow more hawkish. Global bond issuance in the first quarter of 2022 totaled $2.182 trillion, down from $2.264 trillion issued in the first quarter of 2021, according to Ratings.
Over the past two years, with interest rates at historic lows, companies have been able to raise debt and refinance to push out maturities at attractive rates. As interest rate volatility has picked up in 2022, companies have become more cautious.
"Right now I think that companies are going to sit on their hands," said Rob Daly, director of fixed income at Glenmede Investment Management. "And I do think that that means a lighter calendar for at least the next couple of months."
Shocks to the system
Even if the pace picks up in the second half of the year, global issuance is likely to be flat or down compared with last year. The recent selloff in equities and fixed-income markets has been driven by rate volatility, which has been compounded by the Fed not acting fast enough with its rate hikes and moves to pull liquidity out of the global financial system, Daly said.
Quickly rising rates, along with Russia's war in Ukraine, are driving lower issuance forecasts. Other geopolitical shocks, such as rising COVID-19 cases in China that threaten to further snarl supply chains and push inflation higher, will likely slow global bond issuance even further, according to Ratings.
The last time markets faced such geopolitical stressors and shifting monetary policy was in 2018, when global bond issuance fell 5.8%, according to Ratings. At that time the U.S. and China were in a trade dispute and markets were calling for the Fed to loosen financial conditions. Now, with inflation rising, markets are calling on the Fed to tighten its monetary policy.
Fed at the wheel
First-quarter rated U.S. corporate bond issuance slowed from the record pace set over the past two years, with rated first-quarter issuance nearly evenly split between financial and nonfinancial issuers, according to Ratings.
In 2020 and 2021, more companies that fell in the BB and B ratings categories were refinancing debt, and now that the cost of capital is higher they are sitting on the sidelines, said Kevin Nicholson, global fixed-income chief investment officer at RiverFront Investment Group.
"The era of cheap money is over and companies that piled on debt will have to depend on their revenue from operations instead of simply refinancing as the first option," Nicholson said.
Funding conditions in the U.S. remained broadly accommodative in April but are likely to shift to neutral this year as the Fed continues hiking rates and reducing its balance sheet, Ratings said.
"The Fed is still in the driver's seat on this," said Nick Kraemer, head of ratings performance analytics with Ratings. "If the U.S. tightens monetary policy, it kind of forces a lot of other countries to do the same thing."