Global new bond issuance through May 2018 totaled $2.6 trillion, down 3.5% relative to the same point in 2017. This decrease marks a return to year-over-year declines after April's rebound pushed the year-to-date total up 1% for the first year-over-year gain in 2018. Declines are now evident across nearly all asset classes through May, with industrials down 5.1% relative to last year, financial services off 6.7%, and U.S. and international public finance below 2017's totals by 22% and 18.5%, respectively. The lone bright spot, global structured finance, had more than $95 billion of issuance in May, up about 5% year over year, which brought issuance in the first five months of the year to a seven-year high of nearly $470 billion, with all regions exhibiting significant growth.

These figures reflect debt from the corporate, public finance, and investor-placed structured finance sectors. They 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.

S&P Global Fixed Income Research expects global bond issuance in 2018 to decline by roughly 2.3% from the 2017 total (see chart 1 and table 1). Our base case assumptions now factor in heightened market volatility, which arrived sooner in the year than expected and may tick up further, depending on the extent of ongoing global trade disputes and their impact on investment and market sentiment.

A large decline in U.S. public finance will likely be offset, in part, by increases in global structured finance. Meanwhile, we expect a slight decline among nonfinancial corporates, which face modest headwinds in the U.S. via tax reform and have a difficult act to follow in 2017's global totals. For financial services, market volatility could impact near-term issuance trends, but we maintain a base assumption of expansion this year, though at a more muted pace. Finally, international public finance is down roughly 20% relative to 2017, and we expect a general decline to continue throughout the year.

Despite rising Treasury yields, borrowing costs for the private sector remain generally favorable in the U.S. and Europe after rising from historical lows in recent years. We expect the current favorable lending conditions in these regions to hold for the near term, with increased potential for more restrictive conditions later in the year. Additionally, in the wake of rising interest rates in the U.S., a higher likelihood of increasing trade tensions, and increased (though still low) odds of a desynchronization in global economic growth, we expect lending conditions in most emerging markets to become more restrictive over the remainder of this year.

Market volatility for both equities and fixed income has increased this year, particularly in the U.S. However, the recent repricing of Treasuries may largely be a normal response to an increased supply alongside rising rates. The Federal Reserve has been raising interest rates while paring back its Treasury holdings, at the same time that the U.S. government is slated to issue much more debt, thus requiring higher coupons to entice buyers.

It is expected that the European Central Bank (ECB) will end its asset purchase program at the end of 2018--slightly later than expected at the start of this year--which should help to keep financing conditions favorable in the region. However, first-quarter GDP came in weaker than expected, showing higher sensitivity to external shocks than previously assumed. More broadly, global economic growth is expected to rise this year, but downside risks have increased due to trade disputes and the spillover effects of the Fed's interest rate tightening.

Chart 1

Table 1

Because we report our issuance figures in dollars, exchange rate fluctuations continue to be an area of focus this year, and particularly the strength of the dollar. Some appreciation in the U.S. currency is expected, given the combination of rising rates in the U.S. and incentives for firms to convert large foreign holdings into dollars through the repatriation element of the revised tax code. The potential course of monetary policies from other central banks must also be considered, and emerging economies often raise interest rates to keep pace with a strengthening dollar.

Looking Ahead

This year we expect overall issuance to decline by 2.3% from the 2017 total. Relative to the first quarter, most of our base case assumptions still hold, but market volatility this year has cut into issuance somewhat, and the likelihood of further volatility for the remainder weighs in our forecast. We continue to expect growing headwinds for most sectors in the second half of the year. We expect a double-digit decline in U.S. public finance issuance, largely as a result of the revised U.S. tax code.

More restrictive monetary policies could also hamper issuance, although in the case of both the Fed and the ECB, these are expected to be extremely protracted processes, which should limit risks and market overreactions. The first five months of this year have already shown that it will be difficult for 2018 to keep up with the strong issuance totals from last year, particularly in developed markets. These factors, in combination with our quantitative frameworks, inform our issuance forecast.

Nonfinancials

For 2018, we expect total (rated and unrated) nonfinancial bond issuance to decline by 0%-4%. The U.S. is on pace for a noticeable decline and will likely be the primary drag on the global total, faced with the combination of tighter monetary policy and debt-unfriendly elements of recent tax reform, such as the effect of cash repatriation on some of the larger investment-grade issuers in the high tech and health care sectors, as well as the removal of most of the net interest deduction, which could affect some speculative-grade issuers. Across all regions, increasing trade disputes appear to be cutting into fixed investment and leading to renewed market volatility--both factors likely to reduce issuance moving forward.

Issuance in Europe could modestly decline as the ECB cuts back on its monthly bond purchases toward the end of the year and as progress on the Brexit process potentially remains slow to nil. In fact, nonfinancial issuance has already been slowing in the region since its peak in the fall of 2016. Brexit is slated to move toward the more crucial aspects of the divorce (such as trade issues and the Irish border) and could produce headwinds for the region if an unstable outcome becomes more likely, though at this point that seems more unlikely than not. Potentially countering these factors in Europe is the expectation of continued GDP growth of 2.1% in 2018, combined with still-low borrowing costs, which should support issuance.

Chinese authorities have been discouraging increased debt usage since 2016. We anticipate continued efforts to moderate corporate borrowing in 2018, though China remains committed to opening domestic financial markets to international investors. This will almost certainly provide a new source of demand as the government pulls back. Maturing bonds in China over 2018 and 2019 total nearly $600 billion, up from $304 billion in 2016 and 2017. Although some of this total has likely been prepaid, the large increase should support issuance in the country, which accounted for over half of all issuance outside of the U.S. and Europe in the past five years.

Financial institutions

We expect issuance among financial services companies to increase by 0%-5% in 2018. This is a reduction from our forecast last quarter. Market volatility appears to negatively correlate with U.S. and European financial services issuance and has been suppressing activity to some extent this year. Actual first-quarter equity volatility was over three times higher than predicted at the start of 2018, which lowered our issuance forecast.

European banks' increased issuance of new and innovative debt types to boost their bail-in buffers in accordance with bank resolution regimes should provide some support moving forward. And while the potential reversal of monetary policy by the ECB may lower issuance from nonfinancial entities, it could boost issuance for financial services companies, particularly if their negative interest rate loans eventually become part of the unwinding package.

The upcoming maturity profiles of global financial institutions through 2020 also require sizable amounts of new debt for refinancing needs, particularly in China. Banks may also increase their bond issuance to fund floating-rate loans to corporations, which should see increased demand from investors if interest rates continue to rise.

Structured finance

Globally, we now expect combined investor-placed securitization and covered bond issuance could grow by 4%-9% in 2018, given strong year-to-date issuance and some positive regulatory developments. This would constitute a slowdown in the growth rate from 2017, when issuance rose by more than 12% from an unusually low base the previous year. Volumes are now back in line with the longer-term trend, however.

Year-over-year issuance growth so far has been strong, particularly in the collateralized loan obligation (CLO) sector, where the relaxation of U.S. risk retention rules earlier in the year has helped to spur volumes. Downside risks to our issuance forecast include possible market and economic disruptions surrounding increasingly protectionist U.S. trade policy and Brexit negotiations, as well as the potential for broader market volatility in the face of geopolitical tensions and the effect of rising rates on underlying collateral origination.

In Europe, more bank originators have started returning to the structured finance market in preparation for the eventual runoff of long-term subsidized funding taken from central banks over the past several years. (Note that in this report, our figures exclude Chinese securitization issuance rated only by domestic rating agencies, as well as global CLO resets and refinancings, which together accounted for an additional $400 billion in 2017 and have recently shown strong growth.)

U.S. public finance

U.S. municipal bond issuance posted its highest monthly volume in May, although activity continued to lag 2017's totals. May's issuance was 10% lower than in the same month of 2017, but it edged out April for the highest monthly volume in 2018 and boosted issuance to $125.6 billion for the year--19% lower than in the same period in 2017. We expect U.S. public finance issuance to recover after a slow start in 2018, which was due to a deluge of issuance at the end of 2017. For the entire year, we anticipate a significant decline in volume compared with 2017.

Yields fell in May as investors sought safe holdings in response to geopolitical events, including the election in Italy and the off-and-on U.S.-North Korea nuclear arms talks. Returns in May nearly offset losses for the rest of 2018; all S&P Dow Jones municipal sector indices were within about a half percentage point of their Jan. 1 values, with some considerably closer.

International public finance

For international public finance (IPF) issuers, volume in May 2018 was well below the May 2017 volume, leaving the sector 19% below last year's pace. Our first-quarter projection was for volume in 2018 to fall about 10% lower than the 2017 total, but that estimate will likely be revised in our next report.

Through the first five months of the year, only Europe is ahead of its pace from 2017. The largest region, Asia, is off by a considerable amount. The past four years recorded the highest volume ever for IPF, with 2017's steep decline to $540 billion representing the second-highest total on record.

Trade Disputes Heat Up And Volatility Starts To Rise (Again)

Though a far cry from the market reactions in February and early March, volatility rose again in May as trade disputes escalated once more. As expected, the Fed raised interest rates by 25 basis points (bps) in its June meeting, but also indicated a reduction in capital spending as a result of uncertainty over trade policy. At this time, it seems most market participants have fully priced in four rate hikes this year, and second-quarter GDP growth is expected to be around a healthy 4%, indicating enough room for this many rate increases. One of our potential concerns, however, has been the resultant increases in short-term interest rates, which will likely flatten an already declining yield curve further--at least in the short run. Historically a harbinger of recessions, this mismatch in borrowing costs fell below 100 bps at the end of May.

Eventually, higher short-term interest rates will lead to higher borrowing costs for the private sector, and this--combined with a higher likelihood of increased market volatility--is likely to be the primary driver of more restrictive financing conditions for the remainder of the year. Nonetheless, financing conditions in the U.S. remain broadly supportive at this time, though Treasury yields have risen noticeably since the beginning of the year, hitting a seven-year high of 3.1% on May 17.

Some of this increase is likely a response to expectations for stronger economic growth and inflation, but the government is also issuing more debt than normal, increasing the supply of Treasuries. Higher yields on Treasuries may be starting to trickle down into other sectors, but the impact is thus far modest (see table 2). Yields on corporate debt have started to increase, recently hitting three-year highs for both investment-grade and speculative-grade bonds. For example, the yield on newly issued 'B' rated bonds was 7.7% in May, up from 7% a year ago and 7.2% in May 2016. For 'BBB' rated bonds, average yields were 4.05%, 3.5%, and 3.8% at the same points in time.

In relative terms, speculative-grade corporate bond spreads are roughly in line with where they started the year. At the end of May, the five-year speculative-grade spread was 332 bps, up marginally from 328 bps at the end of 2017. Meanwhile, the 10-year investment-grade spread rose by a larger margin, to 136 bps as of May 31 from 114 bps as of Dec. 31. Corporate spreads have not been this low since the same period of 2007. Leveraged loans are also posting multiyear-low spreads, with a large majority of deals classified as covenant-lite, and distress in both asset classes has remained scarce for a protracted period.

Table 2

Despite the recent increases, we do not believe Treasury yields will continue their sharp upward path throughout the year, but they will likely remain elevated relative to 2017. In all likelihood, Treasury yields will remain below 4% for the foreseeable future. S&P Global economists' baseline forecast is for the 10-year yield to reach 3.2% by the end of the year and rise to an average of 3.3% in 2019. Nonetheless, if yields remain around 3% or move higher, higher borrowing costs will likely spill over into other asset classes in the months ahead. It is unlikely, however, that interest rates will approach restrictive levels this year.

Many banks have been easing borrowing standards to companies amid this favorable lending environment. According to the Federal Reserve's April Senior Loan Officer Opinion Survey, U.S. bank lending standards for commercial and industrial loans to large and middle market firms eased from the prior quarter, finishing at -11.3%. This continues the prior four quarters' net loosening after a period of net tightening over the previous six quarters. Notably, all domestic banks that reported easing standards cited increased competition from other lenders as a reason for easing, while many also cited a more favorable or less uncertain economic outlook, as well as an increased tolerance for risk.

Corporate issuance falls in a typically strong month

May is often the strongest month of the year for corporate bond issuance in the U.S., but this May saw a marked decline relative to April 2018 and May 2017. The $94 billion total was roughly $20 billion short of April's total and just about half of last May's $178.5 billion. Much of the decline came from the investment-grade segment, and within that, from a noticeable drop in issuance by financial services. This is essentially a repeat of February and early March, when financial services issuance declined amid increased market volatility. Though volatility has increased again in recent weeks, it has not reached the extent it did earlier in the year.

Among rated bonds (roughly 95% of the total), both the investment-grade and speculative-grade segments saw declines relative to last year at this time, though with a larger proportional decrease in investment-grade issuance (see chart 2). May's declines have contributed to the nearly 20% shortfall in rated bond issuance in the year to date, relative to 2017. Meanwhile, the unrated segment's total is exactly equal to the first five months of 2017, at just under $50 billion.

Speculative-grade issuance fell to $10 billion in May from $16 billion in April and $18.5 billion in May 2017. Higher borrowing costs for Treasuries may be making their way down to the speculative-grade segment, cutting into demand for speculative-grade paper. The year-to-date total is $79.6 billion through May, which is well lower than the $104 billion at the same point last year and also one of the weakest cumulative totals in the postrecession period. If markets continue to be skittish over fears of rising rates and global trade turbulence, we should expect a classic flight to safety, which could result in the end of the recent bull run for speculative-grade issuance.

Chart 2

Leveraged loan issuance has remained strong since the start of 2017, reaching $73.7 billion in May. This is the fifth-highest monthly total ever, as well as a marked increase from both $59.2 billion in April and $49.4 billion last year at the same time. This increase pushes the year-to-date total for 2018 to $301.5 billion, a historically strong start for the year but still short of 2017's $320 billion, which was largely a result of the unusually strong $95.2 billion in January 2017.

The largest U.S. issuer of the month was Maple Escrow Subsidiary Inc., whose $8 billion offer on May 14 was to be used to fund the upcoming Dr. Pepper Snapple merger with Keurig Green Mountain (see table 3). Maple Escrow Subsidiary Inc. is the escrow company issuing the six-tranche deal, and will be merged with and into Dr. Pepper Snapple Group Inc.--which will be renamed Keurig Dr. Pepper Inc. The merger transaction is expected to close in July of this year.

Table 3

Muni volume rises to a normal pace

May's municipal issuance was about 10% lower than in the same month of 2017, although May was the busiest month in 2018. The gap between 2018 and 2017 is narrowing on a percentage basis. Through March, 2018 was 29% behind 2017, and then 23% lower in April. The current difference is 19%. The $30.9 billion issued in May was the lowest total for that month since 2014, when volume for the year was $339 billion (see chart 3).

Chart 3

Refunding volume continues to drag overall activity, falling to $5.4 billion in May 2018, less than half the volume of $12.2 billion in May 2017. For the year through May, refunding volume is 56% lower than in the same period of 2017. New money issuance compensated for part of the decline, increasing to $89.6 billion through May from $72.5 billion in the same period of 2017--an increase of 24%. Issues that combine new money and refunding issues fell 57% year over year, to $17.5 billion from $40.4 billion through May.

Volume in early 2018 was diminished by the record issuance of $62.5 billion in December 2017, rushed through to avoid adverse effects on municipal bonds from the Tax Cuts and Jobs Act of 2017 (TCJA). The only sector with higher volume through May 2018 than in the same period of 2017 was public facilities, which include museums, zoos, beaches, stadiums, prisons, and government buildings.

Before the passage of the TCJA, we expected a lack of refunding to materialize in 2018, given that refunding was 33% of the market in 2017, down from more than 40% in both 2015 and 2016. The tax legislation exacerbated this forecast because it eliminated the tax exemption of advance refunding bonds, a common tool for locking in low rates for proceeds that would be used to refund other debt at a later time. Without advance refunding, we predicted that refunding volume could settle near $50 billion as an annual benchmark, compared with an average of about $120 billion over the past 10 years. Refunding volume is on pace for $44 billion this year, relatively close to our projection, and has made up just 15% of issuance in 2018.

Besides refunding, the other determining factor of overall volume is infrastructure, a major element of municipal finance. The most detailed plan on infrastructure to date from the White House does not include a significant infusion of federal funds to support an increase in state and local bond volume. The timing of the plan is uncertain as well. This uncertainty limits the chance of a spike in municipal volume this year and in 2019.

The negative effects of the TCJA on municipal issuers include the reduction of the corporate tax rate, which makes the tax exemption of municipal bonds less attractive and thus should result in issuers offering higher yields to investors to compensate. Another significant change is the $10,000 cap on the deduction of state and local taxes on federal income tax returns, which will impede state and local jurisdictions from raising or maintaining taxes. The reduced tax flexibility could result in fewer bonds issued because it could become harder for tax jurisdictions to service the debt.

Municipal returns were strong in May, and the S&P Municipal Bond Index rose 1.13% in the month. For the year, the index is down just 0.15%. All sectors posted gains in May, with health care being the most robust at 1.32%. Housing is the only sector experiencing gains for the year, up slightly at 0.09%. The only sectors with losses of more than 0.50% are local government and transportation. The latter sector is probably adversely affected by volume that essentially matches that of 2017. With more supply relative to 2017 than other sectors, transportation issuers are paying higher yields.

Bond insurance covered 5.7% of issuance through May, up slightly from 5.3% for all of 2017.

There were two transactions of at least $1 billion in May. The largest transactions were for $1.2 billion each, from Pennsylvania and the University of California. California issuers had three of the five largest transactions, and Texas had two in the top 10. Three transportation issues were among the top eight (see table 4).

Table 4

California issuers led with volume of $5.2 billion in May, and Texas and New York issuers tied with $3.4 billion. Volumes for six of the top 10 states were down through May. Even though California issuers lead in volume, they are down 40% from 2017 (see table 5).

Table 5

Structured finance issuance breaks postcrisis highs

U.S. structured finance issuance remained strong in May. Although the rate of growth has begun to moderate from earlier in the year, cumulative volume of $225 billion to end-May still constituted a postcrisis high and was up more than a quarter on the first five months of 2017 (see chart 4).

Chart 4

By asset class, the CLO sector posted the highest issuance volume in May, at close to $14 billion. We expect CLO issuance to remain robust in 2018, and volumes in the first five months of the year were up nearly 60% on the equivalent period in 2017, reaching about $60 billion.

Recent legal developments have supported higher CLO issuance. In February, a court ruled that regulations on risk retention in the Dodd-Frank statute should not apply to most leveraged loan CLO managers. Because CLO managers generally purchase the collateral backing these transactions (rather than acting as underwriters on the leveraged loans), the court found that they should not be deemed "securitizers" in the context of risk retention requirements. With traditional CLOs now exempt from the risk retention rule, transaction economics have improved for managers, spurring the return of smaller players in particular.

So far, there has been ample demand to absorb the increasing supply, particularly from investors in Asia. Amid rising interest rates, one appealing feature of CLOs is that they provide investors with exposure to corporate credit in a floating-rate format. However, there are growing concerns that with more CLO money competing for a shrinking supply of underlying leveraged loan collateral, credit standards may begin to slip.

We note that our CLO issuance figures generally do not include additional U.S. CLO pricings that take the form of resets and refinancings of legacy transactions. These amounted to $167 billion in 2017 and a further $66 billion in the first five months of 2018. Significant spread tightening on CLO liabilities over the past few years has motivated CLO collateral managers to refinance transactions that were structured when spreads were higher, calling the outstanding securities and reissuing debt with lower coupons. Some managers have also taken the opportunity to reset transaction features beyond the note coupons, including through changes to the capital structure to increase leverage.

The asset-backed securities (ABS) sector has also seen strong volume growth this year. Issuance has been robust across disparate subsectors, including transactions backed by financings of equipment, shipping, aircraft, and containers. The largest traditional ABS subsector--comprising transactions backed by auto loans and leases--grew by more than 10%, with close to $40 billion of issuance to the end of May.

While still an order of magnitude lower than precrisis norms, U.S. nonagency residential mortgage-backed securities (RMBS) issuance has generally been strongly rising over the past few years. In 2017, the sector posted its highest volume since 2009, and issuance of $26 billion so far in 2018 constitutes a postcrisis high for the first five months of the year. Growth has come not only from traditional subsectors, but also from areas such as single-family rental, credit risk transfer, and nonqualified mortgage transactions.

The ECB Provides A Road Map To Tightening, But With Ample Adjustment Time

Financing conditions in Europe have generally been supportive for lenders for most of the past three years. We feel these conditions will generally hold through most of 2018 and likely into the first half of 2019. S&P Global economists' eurozone GDP growth forecast is 2.1% for 2018 and 1.7% for 2019. This is a slight reduction from the first-quarter forecast but still reflects a solid, if plodding, regional economy.

Countering any slowdown in economic growth, the ECB is now expected to begin winding down its asset purchases at the end of this year, whereas previous estimates were for this process to potentially begin in September. This should extend the current historically low borrowing costs through most of the region well into 2019. As for raising interest rates, the ECB is currently on track to be well behind the Fed, potentially not starting this process until late 2019.

Nonetheless, Europe is facing numerous potential pitfalls, particularly on the geopolitical front. Divisions within Germany, Italy, and the U.K. could weigh heavily in the coming months, particularly with less than 12 months before the official execution of the Brexit process. That said, at this point market sentiment appears to remain broadly optimistic, with only Italian bond yields increasing at a noticeable rate.

In May, market-based indicators of financing conditions in Europe remained broadly favorable, in our view (see table 6). Yields on new corporate issuance hit historical lows in 2017--benefiting from the ECB's bond-buying program and investors' search for yield amid even lower yields on the region's sovereign bonds. Speculative-grade borrowing costs are particularly low and have been so for an extended period, contributing to increased issuance. The average yield to maturity on new 'B' rated issues was 7.1% in May, higher than the 5.6% average at the same time last year but lower than the 8.1% average in May 2016.

Table 6

The most recent ECB Bank Lending Survey, released in May, showed that European bank lending standards for loans and credit lines to large enterprises eased again in the first quarter as loan demand increased. The first quarter's net easing reading of -4.6 marks the 17th straight quarter of net loosening for large firms and was in line with expectations.

Similar to what banks reported in the Fed's bank lending survey for the first quarter, respondents in the ECB survey reported the net easing of standards was largely influenced by competitive pressures, banks' risk perceptions, and their risk tolerance. Net demand for loans to enterprises increased to 15% in the first quarter from 21% in the fourth quarter. Driving this increase were increases in fixed investment, mergers and acquisitions, and interest rates. Looking ahead, banks interviewed for the survey expected another net easing of lending standards on loans to enterprises, as well as increasing demand, in the second quarter of this year.

European corporate bond issuance is keeping pace with 2017

Recent corporate issuance trends in Europe have run generally parallel with those in the U.S.: a particularly weak December, followed by alternating monthly increases and declines. In May, European corporate bond issuance totaled $110.7 billion, up from $99.9 billion in April, fueled by a marked expansion in investment-grade issuance (despite a drop in the speculative-grade segment). However, this total was still a decline from May 2017, leaving this year's April-May total just under the April-May sum from last year (see chart 5).

Thus far in 2018, corporate bond issuance in Europe is down 11.4% relative to 2017 (to $575 billion from $649 billion), and our current expectations are for issuance totals in Europe to decline slightly, given that both the euro and British pound have depreciated noticeably against the U.S. dollar since mid-April. This decline followed the Fed's April 17 release of the board's interest rate meetings from Feb. 26 through March 21, which reflected a growing sense of economic expansion, tight wages, and increases in inflation--all contributing to a growing expectation for higher interest rates in the U.S. All things being equal, this has helped contribute to a sustained rise in the dollar since.

Investment-grade issuance increased markedly in May, to $81.4 billion from $56.9 billion in April, though this increase is generally consistent with historical patterns for these two months. The majority of the increase came from nonfinancials, which saw their highest monthly investment-grade total for the year, at $38.4 billion, led by Vodafone Group PLC's $11 billion M&A financing deal. Despite the uptick, the year-to-date total of $380.2 billion is the weakest since 2010 ($358 billion), as a result of declines in both nonfinancial as well as financial services issuance.

Speculative-grade issuance declined for the second month in a row, to $7.7 billion in May from $15.1 billion in April and $19.5 billion in March. Both nonfinancial issuers as well as financial services experienced declines, but for financial services, the total fell to only $1.7 billion--the lowest monthly total since December 2016. Though borrowing costs are still generally low in Europe, and the ECB is still expected to continue buying corporate bonds through the end of this year, speculative-grade issuance in Europe in the year to date is off by over 22% relative to 2017 ($60.7 billion versus $77.9 billion).

Chart 5

Following two months of declines, leveraged loan volumes in Europe rebounded in May, when €10.5 billion came to market, pushing the 2018 total up to €51.3 billion. This is up from €47.7 billion at the same point in 2017, which turned out to be a 10-year high. That said, the recent trend has been one of declines, with the three-month average total falling to €7.7 billion from an all-time high of €14.8 billion in November. Much of this decline has resulted from interest rates in the U.S. now being appreciably higher than in Europe, causing global investors to move funds back to the U.S.

Despite the clock ticking on the Brexit process, the U.K. had many of the region's largest issuers in May, led by the month's largest deal globally, from Vodafone Group PLC (see table 7). On May 23, Vodafone Group made its first dollar bond offer, totaling roughly $11.4 billion in 'BBB+' rated debt, with the proceeds expected to be used toward its recent acquisition of Liberty Global's operations in Germany and various other European countries.

Table 7

Year-to-date European securitization issuance reaches a seven-year high

In the first five months of 2018, European structured finance issuance--including both securitizations and covered bonds--picked up significantly, with volumes of $177 billion up about 30% year over year (see chart 6). The greatest growth has been among securitizations, with over $65 billion, representing the highest issuance for the first five months of the year since 2011.

As in the U.S., CLO volumes have been particularly robust in Europe, exhibiting more than a threefold increase year to date. This increase has been partly due to U.S. managers issuing debut transactions backed by European collateral, taking advantage of buoyant market conditions. Auto ABS issuance has also bounced back strongly since a weak patch in early 2017, with more than $15 billion issued so far in 2018. Meanwhile, Dutch issuers of RMBS and covered bonds have made a strong start in 2018, placing nearly $19 billion of debt, compared with only $10 billion in the first five months of 2017.

However, there are some caveats to this positive picture of issuance. Part of the dynamic for European issuance has been exchange rates. For the first few months of the year, the euro was up close to 15% against the U.S. dollar, compared with the same period in 2017. With around three-quarters of European structured finance issuance denominated in euros, this somewhat inflates the 2017-2018 issuance growth rates that we present here, which are based on volumes translated into U.S. dollars at exchange rates prevailing at the time of issuance.

In addition, although year-to-date issuance has been strong, we expect volumes in some asset classes could be susceptible to a slowdown later in the year. Unconventional monetary policy has significantly affected supply-and-demand dynamics in the European structured finance market, both through central banks' purchases of covered bonds and securitizations and through their offers of low-cost funding to financial institutions. Supported by buying under the ECB's quantitative easing program, structured finance spreads have been tight. However, the ECB looks set to further taper its net asset purchases after September 2018 and end them at year-end as it progressively normalizes monetary policy. Spreads have already shown signs of widening as this new era approaches, and some originators may have brought planned issuance forward in the year to take advantage of still-favorable market conditions before eurozone asset purchases end.

Chart 6

More positive for issuance is the fact that central banks have also effectively closed their drawdown windows for schemes that previously offered cheap term funding to the banking system. In the medium term, this removes some of the long-standing barriers to bank-originated structured finance supply, with issuers more likely to once again utilize debt markets as their official sector term funding gradually runs off. Issuance early in the year suggests that U.K. banks in particular may be reestablishing their use of both securitization and covered bond funding platforms.

Clarity regarding the future supervisory landscape for European securitizations continues to improve too. The EU's Securitization Regulation (often referred to as the "STS initiative") will come into effect from January 2019, and the ongoing development of the requisite detailed implementation standards has so far presented few surprises. That said, one of the main potential benefits of the Securitization Regulation was that it could pave the way for related changes in other regulations (e.g., Solvency II) that could alter investor economics more materially, potentially increasing demand. However, the changes to Solvency II that were proposed and subsequently adopted by the European Commission in June may not be significant or far-reaching enough to have this effect, with the likelihood of further alterations in the short term now diminishing.

Our issuance figures in this report do not include CLO refinancings and resets, which accounted for nearly $30 billion in 2017 and a further $12 billion so far in 2018. We expect European CLO liability spreads to remain tight in 2018, which will likely motivate collateral managers to continue refinancing or resetting transactions that were structured amid higher spreads to protect equity investors' returns, as in the U.S. market.

Trade Tensions Rise To The Fore In Emerging Markets But Have Minimal Impact So Far

After improving for the past two quarters, financing conditions in emerging markets--while still favorable--may be starting to face headwinds. Nonperforming loans could become a problem in most emerging market subregions, particularly those areas with higher exposure to international funding. Expectations over the next three months are for these challenges to continue, and developing economies are also facing global forces such as heightened potential for trade disruptions, a stronger dollar, and political challenges in Latin America. At this point, economic prospects are expected to remain positive generally, but S&P Global economists note that risks have risen and are becoming more skewed to the downside. Credit quality has been improving for a sustained period, with the proportion of nonperforming loans declining.

S&P Global economists in Latin America and Asia-Pacific have generally maintained their positive outlooks for emerging market economic prospects in 2018. However, they have lowered their GDP forecasts relative to the first quarter, given a sluggish start to 2018, as well as heightened risks surrounding global trade and monetary policy. This is in line with banks surveyed in the Institute of International Finance's (IIF's) Lending Conditions Survey during the first quarter, which expect external political risk to remain elevated, especially with regard to desynchronized global growth and the course of U.S. trade and monetary policies. S&P Global economists feel that Latin America still faces heightened risk due to domestic political dynamics as well, including the future of the North American Free Trade Agreement (NAFTA) and upcoming elections in the region. Specifically, the situation in Argentina has deteriorated since the beginning of the year, with a falling currency and resultant (and reinforcing) capital outflows.

In the first quarter of 2018, the IIF Lending Conditions Survey for emerging markets reflected improving lending conditions, but to a reduced degree as compared with the fourth-quarter 2017 survey. The overall reading fell to 50.4--still in expansionary territory--from 51.1 in the prior survey. Regionally, Africa and the Middle East finished with restrictive lending conditions (a reading of 48.4), while all other regions came in at roughly 51. This was the third quarter in a row with a reading above 50, after a multiyear period of tightening conditions (see chart 7).

This index is a diffusion index, meaning readings below 50 indicate a tightening of bank lending conditions and those above 50 imply loosening conditions. Among the five topical subindices that make up the lending index, only trade finance saw an improvement, to 54.2 from 53.6. Among the others, demand for loans saw the greatest decline, to 51.9 from 53.7, with the largest declines in emerging Europe and Latin America, though both regions are still above a reading of 50, by four and three points, respectively. Despite most regions and subindices maintaining readings above 50, the declining trend is expected to continue into the second quarter, with overall financing conditions in emerging markets projected to return to restrictive territory.

Chart 7

Relative to the fourth-quarter survey, most emerging market subregions saw declines across most components of the index in the first quarter. Broadly speaking, the exception to the general decline was Africa and the Middle East, while many of the largest declines came from emerging Europe (see chart 8). Expectations for the second quarter of 2018 point to an overall decline in lending conditions, but with mixed projections from one region to another. In general, the Africa and Middle East region is expected to have improving conditions across most subcategories, and emerging Asia is also expected to experience easing conditions.

The region expected to see perhaps the most deterioration is emerging Europe. This region could experience an overall decline in lending conditions of roughly 5.4 points, potentially moving into restrictive territory for the first time since the third quarter of 2015. Most of emerging Europe's expected decline results from participants' expectations for a large increase in the share of nonperforming loans--with an expected drop of nearly 19 points, to 38.8 from 57.5 currently.

Chart 8

Because China dominates emerging Asia's issuance and Brazil heavily influences Latin America's, conditions in these countries will tend to have a disproportionate effect on their respective regions' issuance totals. Last year began with a cloud of uncertainties surrounding the Trump Administration's trade policies and their potential implications for the Asia-Pacific region and China in particular. These fears were resurrected in March as the U.S. began talks of imposing tariffs on steel and aluminum, followed in turn by China proposing countertariffs on many imported goods from the U.S. Other international players, from the U.S.' NAFTA colleagues to the EU, are now among those subject to U.S. tariffs as well as those implementing countertariffs against the U.S. Markets have responded with falling equities in the U.S. and the VIX increasing again.

Corporate bond issuance in China has grown in recent years, despite government actions aimed at deterring growing debt levels (see chart 9). Thus far in 2018, emerging Asian corporate bond issuance is up slightly from 2017 in terms of issue count, but far higher by dollar amount. In May, 240 new issues came to market, compared with 323 last year, though in the year to date (through May), 2018 has had 1,900 new issues, up from 1,822 in 2017.

Thus far, China has accounted for about 72% of the emerging Asian total (by issue count), which is up substantially from 56.6% last year but consistent with 2016 at this time. In terms of dollar volume, the emerging Asian total of $62.5 billion in May is slightly lower than May 2017's $64.4 billion, but the year-to-date total is up to $422.8 billion from $363.8 billion last year.

Chart 9

Latin America has recently experienced issuance growth alongside economic recovery in the region. However, a growing number of potential risks lie ahead, both externally and politically. Any delayed agreement over the future of NAFTA, or any breakdown in negotiations, could have deleterious effects for Mexico. Latin America also faces upcoming elections, and though conditions are subdued for now, another political upheaval in Brazil would certainly impede the economy and financial markets. Finally, higher interest rates in the U.S. appear to be negatively affecting capital flows into the region as the risk premium in Latin America has recently tightened.

S&P Global economists have reduced their baseline economic forecasts for the region over the past few months, mostly as a result of deteriorating external factors, such as a strengthening dollar, reduced capital inflows, and increased domestic political uncertainties. They have lowered their expectations for real GDP growth to 1.6% from 2.2% in 2018 and to 2.2% from 2.6% in 2019 for Latin America as a whole (see "Less Favorable External Conditions Will Challenge The Economic Recovery In Latin America," June 28, 2018).

Corporate bond issuance in Latin America steadily grew in 2017 after declines in previous years. This momentum--particularly in Brazil--has continued into 2018 (see chart 10). Latin American bond issuance is up in terms of dollar amount relative to this time last year, but well lower by issue count. In May, $8.5 billion came to market, up from $5.7 billion last year, while the total issue count fell to 39 from 61. Most of the activity thus far in 2018 has been driven by Brazil (60.8% of issues and 48% of face value debt). Meanwhile, issuance has either dropped dramatically or has been nonexistent this year from Argentina and portions of Central America and the Caribbean.

Chart 10

Normally, Chinese firms dominate the list of largest emerging market issuers on a monthly basis, and this was generally true again in May (see table 8). One notable exception was PEMEX, which came to market twice in May--once on May 3 and again on May 16. The majority of the issuer's monthly total came on May 16, in a four-part $3.7 billion deal, whose proceeds are to be used to finance PEMEX's investment program, working capital needs, and debt repayment.

Table 8

International Public Finance

IPF issuance in May 2018 was 41% lower than in May 2017, putting 2018 volume 19% behind last year's pace. Europe was 39% higher through May than in the same period in 2017, but Asia was 32% lower and is the largest region for IPF. Canada was flat from 2017. Latin America, which is the smallest region by volume, issued $1.5 billion through May. The region issues most of its debt through loans not tracked in this survey, and it represents 1% of public finance volume outside of the U.S.

June and July of 2017 were notably strong months, as was May of last year. If 2018's pace over the next two months falls well short of last year's volume, IPF issuance could be off by a significantly higher percentage than our current 10% projection.

Data on non-U.S. public finance volume are not reliable for determining the true size of borrowing, but the numbers can highlight major trends. The past four years have recorded the highest volume ever in IPF, averaging $518 billion annually.

Other Global Structured Finance

Outside the U.S. and Europe, structured finance volumes have been growing so far this year. Most of this activity is in Australia, Canada, and Japan, with all three of these countries posting year-to-date issuance growth when combining covered bond and securitization volumes. While both Australian RMBS and covered bond issuance are modestly up on their 2017 starts, Canadian covered bond issuance has been even more buoyant, up to nearly $16 billion from $8 billion in the first five months of 2017. Overall, structured finance issuance outside the U.S. and Europe has reached $70 billion year to date, up 13% year over year.

In this report, our figures exclude Chinese securitization issuance rated only by domestic rating agencies, which has boomed in recent years to more than $200 billion in annual issuance. However, as the Chinese securitization sector develops, the volume of internationally rated issuance has also been expanding and will likely be a source of further growth this year. We anticipate that structured finance issuance outside the U.S. and Europe could reach $170 billion in 2018.

Related Research

• Escalating Trade Measures Reorder Macro Risks In Asia-Pacific, June 28, 2018
• For The U.S. Economy, Will An Endless Summer Lead To Sunburn?, June 28, 2018
• Less Favorable External Conditions Will Challenge The Economic Recovery In Latin America, June 28, 2018
• Monetary Policy Normalization In The Eurozone: Will One Size Fit All?, June 26, 2018
• Asia-Pacific Refinancing Study--A Peak Of $253 Billion In Rated Corporate Debt Is Set To Mature In 2020, Feb. 13, 2018
• U.S. Refinancing Study--$4.4 Trillion Of Rated Corporate Debt Is Scheduled To Mature Through 2022, Feb. 6, 2018
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• European Refinancing Study--€3.3 Trillion Of Rated Companies' Debt Is Scheduled To Mature By End-2022, Jan. 29, 2018
• Global Refinancing Study--$10.23 Trillion In Rated Corporate Debt Is Scheduled To Mature Through Year-End 2022, Jan. 26, 2018