Chart 1

Table 1

S&P Global Ratings Research expects global bond issuance to contract about 0.2% in 2021 and 2% in 2022 (see chart 1). In aggregate, global bond issuance will fall short of 2020's record level, however only just so. Through September, global bond issuance in 2021 reached $6.7 trillion, a 1.2% decline from the same period last year. We expect the fourth quarter to bring the annual total to just shy of 2020's historic level, however some sectors such as U.S. financial services--bolstered by what appear to be still-strong third-quarter earnings reports--could see stronger fourth quarter activity, which could provide some upside.

Looking forward, inflation concerns, prospects for rising rates, still-high cash balances, and possible tax reform all translate to headwinds for issuance in 2022. We expect these will lead to a second year of contraction in total issuance, however our projections are still largely in line with long-term growth rates.

A Confluence Of Headwinds, But Not A Perfect Storm

As 2021 draws to a close, the recovery from the pandemic in 2020 has been moving along faster and stronger than many initially anticipated. With this has come some expected--and unexpected--behavior in inflation rates since the first quarter. Our economists expect inflation in the U.S. and Europe to be largely transitory, with the anticipated jump seen in the second quarter due to low base effects from suppressed activity at that time in 2020. That said, compared to the previous year, inflation reached its highest point so far in 2021 in September, with the headline Consumer Price Index (CPI) in the U.S. showing 5.4% growth. Increases in producer prices have been even higher, as the world is facing supply shortages and bottlenecks.

Higher inflation could still prove transitory, but a growing proportion of market participants are concerned it may persist. At least initially, inflation has not translated to headwinds for issuers. Higher inflation has pushed real (inflation-adjusted) interest rates below zero in the U.S., and in August, even for European speculative grade. This has coincided with a marked increase in the global corporate M&A pipeline (see chart 2). Some of the activity in 2021 can be argued to be a rebound from suppressed levels in 2020, but there was a clear uptick globally once real yields started falling below their prior trend levels.

Chart 2

Some of this M&A volume could be a "pull-forward" of activity that might have happened in 2022. There are a few possibilities that could support this notion: expected tax reform in the U.S., which could raise the headline corporate rate, and increased taxes on capital gains, which could impact owners of private equity firms. Another is the growing expectation for higher interest rates in response to higher inflation. Our economists expect benchmark government yields to increase in 2022 for developed markets, and many now expect the Federal Reserve to increase the federal funds rate in 2022, sooner than what was anticipated in the last few months (see chart 3). With yields in municipal and corporate sectors so low globally, it is likely that any increase in benchmark yields will result in higher borrowing costs for other sectors. The five-year U.S. speculative-grade bond spread is currently around 350 basis points (bps), so further tightening is either unlikely, or would be limited.

Chart 3

Of course, not all M&A activity is funded via new debt issuance. But M&A as a use of proceeds for investment-grade and speculative-grade bonds, as well as for leveraged loans, has reached exceptional levels in the U.S. this year--roughly $494 billion through September, which slightly tops the strong totals seen in 2018.

Another potential headwind for bond issuance next year is China's intent to reduce debt reliance throughout its economy. We have recently seen more defaults among China's homebuilders sector as the country's "three red lines" policy has limited debt growth. The contribution of Chinese issuers to global totals across asset classes is considerable (see chart 4). Since 2016, Chinese issuers have accounted for just under a quarter of both nonfinancial corporate and financial services issuance. The country's homebuilders/real estate sector alone has contributed nearly 6.5% of the global nonfinancial total. And the impact is disproportionately large among bond issuance in the international public finance sector, at nearly two-thirds of the total over recent years.

Chart 4

Though difficult to predict the exact impact of China's current deleveraging policies, they have arguably already affected the 2021 totals. Slowing debt growth has been uneven for China across the sectors we track. Prior attempts to stem debt growth in years past had also had little impact on the issuance totals, but we are taking a cautious outlook in the year ahead.

Issuance Projections

We expect nonfinancial issuance to decline roughly 14% this year and around 7% in 2022

Through September, global nonfinancial bond issuance totaled $2.3 trillion, making for a 16.5% decline from 2020. We expect issuance in the fourth quarter will generally hold to this pace, with some potential upside as issuers come to market ahead of 2022.

For 2022, we currently anticipate a 5%-10% decline. Financing conditions remain very favorable and demand for debt high. However, interest rates are generally expected to rise in 2022. We do not expect the high volumes of M&A activity seen this year to continue into 2022, as some of this year's total may be a "pull-forward" of deals which would have happened in 2022. Concerns over possible tax reform in the U.S., as well as the very high likelihood that currently low nominal and real interest rates will rise, should provide headwinds.

The largest issuers of debt in 2020--investment-grade nonfinancial companies--still have very high levels of cash and short-term investments available, with our analysts estimating those we rate in the U.S. and Europe, the Middle East, and Africa (EMEA) to have roughly $3.08 trillion on hand, a 9% increase over 2020. Such funds may deter debt issuance by investment-grade firms, while speculative-grade bond and loan issuance in the U.S. and Europe is on track to far exceed prior annual totals, making 2021 a difficult act to follow.

We expect China to see issuance moderate again in 2021. The government has been moving to stem debt growth throughout the economy, and in particular for the homebuilders/real estate sector, which is the largest in terms of nonfinancial corporate issuance in recent years. Through September, bond issuance growth in 2021 is only up about 2%, compared to 19% in 2020 and 24% in 2019. Nonetheless, the potential refinancing pipeline in China is huge. Roughly $1.4 trillion face value of bonds will mature between 2022 and 2024, which should offset some of the anticipated impact of deleveraging policies.

Despite two years of actual and expected declines, our nonfinancial corporate issuance forecast is roughly in line with the 4.75% compound annual growth rate between 2012 and 2019 (see chart 5). Because 2020 was such an anomaly, even the two successive years of our projected declines would result in a "surplus" of roughly $775 billion over the trend projected by the CAGR.

Chart 5

Financial issuance could increase about 10% in 2021, with another marginal increase in 2022

Even after a particularly strong total in 2020, global financial services issuance was up 12% through September (to $2.08 trillion). Thus far, issuance has remained strong in the U.S. and China. At the end of the second quarter, we thought a 10% increase in issuance for the year would be toward the high end, however we have expanded our range since. Once again, strong quarterly earnings for many of the largest banks in the U.S. in the third quarter should support continued strength through the end of the year.

Earnings growth will likely slow moving forward, as base effects will be less dramatic now that the worst of the pandemic's 2020 impact has passed. The M&A pipeline for global financial services has also grown in recent months, particularly in the U.S. Financial services companies have been aggressive acquirors in 2021 amid low interest rates. Though some of this may be moving up activity that otherwise would have been seen in 2022 if companies are getting ahead of potential tax reform in the U.S., which may make mergers and other shareholder-friendly activity less desirable in the future. If rates rise, as expected, this would also make leveraged transactions more costly moving forward. With these likely headwinds, we expect issuance in the U.S. to moderate somewhat relative to 2021 levels.

Initially, we expected the European Central Bank's (ECB's) third round of targeted longer-term refinancing operations (TLTRO III) to cut into bond issuance by banks in the region. However, through September, European bank issuance is up 6.3%. The second half of 2020 did see a marked slowdown in issuance relative to the first half of 2020, and also saw an appreciation of the euro against the dollar. At this time, we generally expect similar issuance levels for 2022 out of Europe but could see some upside very late next year as the TLTRO III program starts to retire.

Issuance growth from China has been very strong in recent years, with roughly $200 billion increases in both 2019 and 2020, equating to 48% and 35% annual growth rates, respectively. The healthy refinancing pipeline, with over $1.4 trillion of bonds due 2022-2024 (based on face value), should also support issuance for the remainder of the year. That said, we expect the general deleveraging effort in China to limit the country's issuance growth in 2022 as borrowers may face restrictions on lending, which should reduce banks' need for funds to lend. Here we expect a much slower pace of growth relative to recent years.

Global structured finance issuance is bouncing back, with over 20% growth in sight for 2021

Structured finance issuance globally grew 26% over the previous year in the third quarter of 2021, totaling $853 billion. The U.S. recorded the largest advance in issuance so far in 2021, up 70% compared to third-quarter 2020. Global structured finance is set to increase at least 25% for the full year 2021, compared to 2020, likely surpassing $1 trillion for the first time since 2019. In 2022, we expect more modest growth in the single digit range, due largely to a difficult comparison in 2021, but still largely supported by healthy economic growth.

Structured finance issuance in the U.S. is expected to end 2021 up by a large margin. But in 2022, growth rates are expected to come down on the back of an exceptional rebound in issuance between 2020 and 2021. Still, 2022 is expected to end in overall increase, albeit at a much slower pace than in 2021.

Each subsector is poised to report increases or relatively unchanged volume at the end of the 2022:

• Asset-backed securities (ABS) issuance should continue to grow, underpinned by elevated used-vehicle prices, combined with expectations for increased sales expected in the near term. Returning demand for both Federal Family Education Loan Program (FFELP) student loans and more esoteric collateral, such as consumer product and equipment leases, are also supportive.
• Home price appreciation is expected to remain positive through 2022, supporting further residential mortgage-backed securities (RMBS) originations, specifically in the non-qualified mortgage space.
• Commercial mortgage-backed securities (CMBS) issuance returned to 2019 levels and should remain elevated through year-end. In 2022, we expect issuance to be relatively unchanged as the sector shakes off the impact of the pandemic.
• Structured credit (SC) origination volume is up 146% through the third quarter of 2021. And the leveraged loan market has already set a full-year issuance record by volume, at about $624 billion year to date, setting the stage for additional growth in SC issuance in 2022.

European structured finance issuance has struggled to rebound, despite a strong third quarter in 2021 compared to the two preceding quarters, leading us to expect lower volume relative to 2020. Additionally, S&P Global economists have revised their growth expectations for the region upward for 2021 and 2022. Despite lagging in the year to date, securitization volume is now in line with pre-pandemic and pre-simple, transparent, and standardized (STS) regulations. Covered bond issuance remains deflated as credit institutions draw down large volumes of cheap term funding from central banks, reducing capital market needs. We do not expect this to change by year-end. However, the ECB's TLTRO III program is set to wind down during the second quarter of 2022, leaving room for growth in the second half of 2022.

Outside the U.S. and Europe, we expect issuance to increase overall in 2021, currently up 5% as of the third quarter. For 2022 we expect volume to remain at roughly the same level. Like Europe, securitizations have outpaced 2020 considerably in 2021 in Australia (95%), Latin America (80%), and Japan (19%). Covered bonds have suffered across the board, and we expect them to remain depressed through the end of 2021.

U.S. public finance issuance is set to decline in 2021 but could see a slight increase next year

We maintain our forecast for U.S. public finance issuance of about a 5% decline relative to 2020, which would call for about $113.8 billion in issuance for the fourth quarter. This would compare to roughly $130 billion in the fourth quarter of 2020, which saw a particularly strong October.

Looking ahead to 2022, our preliminary forecast calls for a slight increase in issuance of about 2%. Our current expectations are contingent on the passage of some form of reconciliation package along with an infrastructure bill. If only one--or neither--pass, our forecast would change to the downside. It is anticipated that an infrastructure package could include a resumption of Build America Bonds, which would provide a tailwind if included. A second possible boost could come from a resumption of tax incentives for advance refunding bonds, which saw a decline after tax reform in 2017.

International public finance is likely to contract slightly this year and next

In 2020, international public finance issuance surpassed $1 trillion for the first time. This year's total should come in lower, though likely still topping $1 trillion overall.

As with nonfinancial corporates and financial services, the future course of debt reliance in China is key to our 2022 assumptions, and we will be adjusting our forecast as necessary depending on the course of restrictions next year. China dominates this sector's issuance, providing 70% of the year-to-date total of $909 billion, and is showing growth thus far in 2021. However, that growth is being offset to some degree by a decline in issuance outside of China. Coupon rates remain historically low, favoring borrowers and encouraging more issuance, which may help combat some headwinds.

2021 summary

Global bond issuance through the third quarter of 2021 totaled $6.7 trillion, down 1.2% from the same period in 2020. A majority of sectors showed declines, led by global nonfinancials (down 16.5%), followed by international public finance (down 4.8%), and U.S. public finance (down 2.4%). Meanwhile, global structured finance has seen tremendous growth (up 26%) with this year's largest sector so far--global financial services--up 12%. These figures cover 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 Remain Favorable

Despite some recent volatility in equity markets on inflation and contagion fears around Chinese property developers, financing conditions for fixed income markets stayed overwhelmingly favorable in the third quarter (see table 2). Across all levels of credit quality and either short-term or long-term debt markets, demand remains strong and financing conditions loose.

Inflation has been running higher and for longer than many initially expected, and with such low yields across the board, nearly all rated corporates have been seeing negative real yields (as calculated by taking the secondary market yields for corporates minus the year-over-year changes in CPI) for several months. This is attributable to the incredibly low nominal yields for most asset classes recently as well as perhaps the assumption that recent increases in inflation will prove transitory. This has been a boon to issuers, but it remains to be seen how long investors can continue supporting this imbalance.

We expect financing conditions should continue to be favorable over the near-term but are likely to become more restrictive in 2022. Many market participants appear to believe the Fed will raise rates sometime in the third quarter next year. Even though borrowing costs will likely rise, they will remain below the benign levels seen through most of 2011-2019. If inflation does prove to be transitory, it may leave the Fed enough room to take increase interest rate more slowly.

Some factors we currently consider to have unknown impacts range from the future course of energy prices, future legislation around infrastructure and taxes, and possibly the retirement of LIBOR on new leveraged loans at the end of this year. Some see LIBOR's sunset as having minimal impact, however very few loans have been issued yet using an alternative rate. How this transition may affect leveraged loan issuance in 2022 remains uncertain, but it could conceivably result in a temporary period where issuing bonds becomes a necessity.

Table 2

Strong U.S. corporate issuance slowed in the third quarter

Rated U.S. corporate issuance has slowed since March but remained strong in the third quarter with issuance totaling $325.2 billion (see chart 6). U.S. rated issuance reached its lowest monthly level of 2021 in July before picking back up in August, and the bulk of the quarter's issuance came in September. Every rating category except for 'AAA' and 'AA' had strong issuance in the third quarter.

Speculative-grade issuance fell to $88 billion for the quarter as total issuance year to date reached $321.3 billion, which is the strongest pace for speculative-grade issuance through the first three quarters during any year.

The bulk of third-quarter issuance was in the 'A' and 'BBB' categories, with $91.2 billion and $118.9 billion, respectively, representing nearly two-thirds of all rated issuance in the quarter. Investment-grade issuance was strong during the quarter, totaling $237.2 billion.

Chart 6

Rated nonfinancial issuance was strong with $201.7 billion, slightly lower than second-quarter issuance. Issuance in the high technology ($34.7 billion), homebuilders/real estate co. ($21.6 billion), utilities ($21.6 billion), retail/restaurants ($17.4 billion), and healthcare ($17.3 billion) sectors accounted for nearly three-fifths of all rated nonfinancial issuance.

Rated financial issuance was also strong with $123.5 billion, but well below second-quarter issuance.

Morgan Stanley topped the list of issuers in the third quarter, with a total of $12.3 billion of notes across six bond offerings (see table 3). The outlook on Morgan Stanley is positive.

Table 3

U.S. leveraged loans are already setting records, with one quarter to go

U.S. leveraged loan market issuance is on a record pace in 2021. Total institutional loan volume through Sept. 30 is $487 billion, surpassing the prior high for the first three quarters of $405 billion in 2017, and within easy striking distance of the 2017 full-year record of $503 billion (see chart 7).

Chart 7

The advance is broad-based, with many category totals comfortably ahead of prior all-time highs for the first three quarters or setting new full-year records. Total M&A volume of $250 billion is ahead of the 2018 high of $226 billion, while M&A via private equity sponsors is $188 billion, up from $167 billion, also in 2018. Leveraged buyout volume is at a record pace for the first three quarters (see chart 8).

Chart 8

This wave of issuance has propelled the amount of institutional U.S. leveraged loans outstanding, as measured by the S&P/ LSTA Leveraged Loan Index, to a record $1.3 trillion. The index has grown for seven straight months, by $113 billion, the biggest expansion for any such period since February 2019.

Leveraged loan issuance has been buttressed by strong investor demand via a consistent stream of retail cash funneling into the market, with $25.9 billion of net inflows, based on Lipper's weekly reports through Sept. 29, and a heated collateralized loan obligation (CLO) market that has itself been on a chartbusting pace in 2021 (see chart 9).

Chart 9

In the third quarter, the volume of primary CLO issuance was $46.7 billion, up from the previous record of $43.4 billion in the second quarter and marking the third consecutive record-breaking quarter. Year to date deal flow at $130 billion also topped the yearly volume record of $129 billion in 2018.

Surging investor demand for leveraged loans kicked open the door for opportunistic transactions early in 2021, and this door remained wide open in the third quarter. While repricing and refinancing cooled off from the supercharged levels earlier this year (refinancing volume dropped 28% compared to the second quarter to $29.4 billion), dividend recapitalizations--which often include refinancing existing debt--remained popular. The total volume of dividend recapitalizations is already a full-year record, surging to $67.2 billion year to date (see chart 10).

Chart 10

Whether for M&A or opportunism, borrowers in the 'B' bracket have hit the market at a record pace, even as clearing levels in the primary market continue to bump along historically low levels. Loan issuance from 'B' category companies was $352 billion in the first nine months of 2021, blowing past the prior three-quarter peak of $278 billion in 2017, and eclipsing the full-year record of $334 billion, also in 2017. Issuers with at least one 'B-' rating have tallied $192 billion of loan issuance over the three quarters of 2021, representing 55% of the total 'B' bracket issuance, more than in any comparable period in history. In the third quarter, issuance from 'B' category issuers accounted for 75% of total institutional volume, essentially evenly split between issuers with at least one 'B-' rating and those squarely in the 'B'/'B+' realm.

Despite this flood of activity, the new-issue spread for 'B' issuers fell to L+402 on average in the third quarter, from L+420 in the second quarter, while 'B-' spreads were roughly unchanged at L+437. That widened the gap between the two spread levels to 35 bps, from 18 bps last quarter, which was the lowest reading in at least five years. Still, the third-quarter spread differential remains narrow compared to the five-year average of 51 bps (see chart 11).

Chart 11

U.S. public finance issuance fell in the third quarter and is on track for a decline in the full year

U.S. municipal bond issuance in the third quarter of 2021 was $114.4 billion, down from $120.7 billion in the second quarter and $144.7 billion in the third quarter of 2020 (see chart 12). Issuance averaged $38.1 billion over the three months, down slightly from the monthly average in the second quarter. Issuance in the third quarter averaged $99.3 billion over the last 10 years, with the highest issuance coming in 2020 and the lowest ($74.4 billion) in 2013.

Chart 12

Breaking out issuance into components, new money issuance has risen to 67% of all issuance through the third quarter, compared to 57% for all of last year. Refunding has fallen in percentage terms, down to 23% from 31% last year, while mixed used issuance was 11%, down slightly from 12% last year (see chart 13).

Chart 13

There were three large individual issues in September, with two California entities--the State, and the Community Choice Financing Authority--placing issues of $2,095.1 million and $1,234.7 million respectively, followed by the New York City Transitional Finance Authority, with a $1,200 million issue (see table 4).

Table 4

Year to date, California has issued the most debt, with $56.7 billion, up 4.8% compared to this time last year. New York is second, with $39.4 billion, down 14.6% compared to last year (see table 5).

Table 5

U.S. structured finance is on track for the most active year on the books

U.S. structured finance issuance reported its highest quarterly total in 2021 during the third quarter, at $205 billion, advancing year-to-date volume to $524 billion, 70% over the previous year (see chart 14). We expect originations to total well over $600 billion by the end of 2021, which would exceed any full year total since 2007 that was induced by the volume drop-off following the great financial crisis. Each subsector reported double-digit growth in the third quarter of 2021 compared to the same period last year.

New-issue CLO originations are up 147% through September compared to the same period last year, to $141 billion. The third quarter added $50 billion to the sector total. Demand for CLOs remains robust in the face of continuously rising U.S. Treasury yields and increasing inflation, leaving managers with more appetite for floating-rate securities. Middle-market CLOs saw increased demand for both new-issue CLOs as well as refinancing and resets during the first three quarters of 2021. Credit metrics have been accommodating, with 'CCC' rated loans becoming less prevalent in portfolios, while the share of 'B-' credits has steadily grown.

Spreads widened slightly in the third quarter compared to the first half of the year. However, the anemic rise still leaves spreads at close to the narrowest point in February 2021, making the sector even more inviting. Separately, while we do not include the origination levels for CLO refinancings and resets in our global and regional totals (see charts 1, 16, and 23 and table 1), we do keep close track of this segment. In September, CLO refinancings and resets rose to $127 billion year to date--an all-time high. Spread tightening has played its own role in the historic CLO refinancing and reset volume as managers refinance and reset existing bonds at lower cost.

U.S. ABS issuance rose 42% through the third quarter compared to last year, totaling $202 billion this year through September. Auto ABS still holds the highest concentration in ABS with $92 billion through the third quarter, a 10-year high. The student loan ABS sector has been particularly active, with $13 billion in issuance through September 2021. At the beginning of the year, private collateral, rather than FFELP loans, dominated student loan ABS. In the third quarter, the number of FFELP originations increased, keeping pace with private sector loans. The third-quarter year-to-date total for student loan ABS was $23 billion, the highest level since 2012.

Credit card ABS is experiencing some reprieve in terms of new issuance, following a 10-year low in 2020. The third quarter recorded $8 billion in originations, 4x the amount issued in the same period in 2020. Pent-up savings from consumers throughout the pandemic came in tandem with a drop in discretionary spending. The U.S. is working is its way toward recovery, supported by widespread vaccinations, however S&P Global Economics has revised down U.S. macroeconomic assumptions for year-end 2021. Meanwhile, ABS originations in more esoteric sectors totaled $47 billion year to date in the third quarter.

Chart 14

U.S. RMBS originations increased to $130 billion through the third quarter, growing 88% over the same period in 2020. Each month in the third quarter saw double-digit growth in origination volume. The prime jumbo space has been growing the fastest, dominating the majority of issuance in the first three quarters with $81 billion of the total. The RMBS "other" sector added $49 billion in the first three quarters, consisting mostly of nonperforming loans, seasoned loans, and credit risk transfers. We expect demand for new and existing home sales to remain elevated throughout 2021, maintaining the pace of new originations.

U.S. CMBS originations have returned to pre-pandemic levels with $51 billion through the first three quarters of 2021, increasing 35% over the comparable 2020 period. The sector has reported consecutively increasing volumes each month throughout 2021, with $21 billion in originations in the third quarter, compared to $19 billion in the second quarter and $11 billion in the first quarter. Commercial spaces are no longer a high risk to the vaccinated population and have finally reopened in a limited capacity. We expect the rise in CMBS issuance to continue in line with the reopening of the U.S. economy.

European Financing Conditions Also Remain Favorable, Despite Some Inflation

Financing conditions in Europe remained very favorable through September (see table 6). Speculative-grade corporate bond spreads have remained close to 300 bps since mid-March, and the second-quarter ECB survey of lending conditions showed a contraction into loosening territory, implying easier lending conditions for corporations relative to the first quarter of 2021. Overall, we expect the European economy to rebound in 2021, but more slowly than the U.S. economy. The continuation of favorable financing conditions remains a key component of this recovery.

Because inflation in Europe is still well below that seen in the U.S., our economists expect the ECB to hold off on any rate hikes until about 2024. That said, real yields on speculative-grade bonds dipped into negative territory in August once inflation breached 3%, largely due to higher energy costs. Our analysts expect oil and gas prices to fall next year but stay elevated compared to historical levels.

Through September, combined speculative-grade bond and leveraged loan issuance has already set an annual record at €254.9 billion, with 100% of deals in the third quarter being covenant-lite. Also testifying to strong demand, the LCD Leveraged Loan Index Distress Ratio reached 1.2% at the end of the third quarter.

Table 6

The drop in Europe rated corporate issuance in the third quarter was led by 'BB' issuance

Europe rated corporate issuance fell to €158.8 billion in third-quarter 2021, with issuance falling across all rating categories, led by 'BB'. Issuance dropped to the lowest monthly level of 2021 in July and then rebounded in September, with the final month of the quarter accounting for nearly three-fifths of third-quarter issuance. The third quarter saw strong issuance in just the 'BBB' and 'B' categories. (see chart 15).

Chart 15

Speculative-grade issuance in the third quarter fell to a still-strong €31.7 billion, the lowest level for quarterly issuance since first-quarter 2019. Total issuance year to date reached €147.6 billion, the strongest pace for speculative-grade issuance through the first three quarters of any year.

Investment-grade issuance remained below average in the third quarter, falling to €127.1 billion. The 'A' and 'BBB' categories, at €42.9 billion and €66.8 billion, respectively, account for over two-thirds of all rated third-quarter issuance.

In the third quarter, rated financial issuance totaled €106.2 billion while nonfinancial issuance totaled €52.5 billion, each below average for quarterly issuance. Issuance in the consumer products (€8.5 billion), homebuilders/real estate (€8.4 billion), utilities (€6.9 billion), automotive (€5.2 billion), and media and entertainment sectors (€4.8 billion) accounted for about two-thirds of all rated nonfinancial issuance.

ENEL Finance International N.V. topped the list of issuers in the third quarter, issuing a total of €6.8 billion of senior unsecured notes across two bond offerings (see table 7).

Table 7

European leveraged loans also reached a record high

European leveraged loan volume dropped off in the third quarter after a red-hot first-half of the year, though 2021 remains a historically busy one for the market (see chart 16). Furthermore, the forward calendar remained full as the pipeline of loan deals was taking longer to flow through to market than expected, thereby leaving a busy syndication schedule for the start of the fourth quarter.

Chart 16

European leveraged loan volume for the third quarter was down at €24.8 billion, compared with €41.2 billion in the first quarter and €41.3 billion in the second quarter. Despite this third-quarter drop, the market's issuance this year through September remains very strong, with €107.3 billion of loan volume. This tally already exceeds all full-year totals on record, apart from those notched up in 2017 and 2007 (see chart 17).

Chart 17

A key difference between this year and 2017 is the composition of the type of deal flow the market is seeing, with M&A-related transactions accounting for 59% of total institutional volume this year so far, compared with 41% in full-year 2017, according to LCD. Dividend recap activity was steady at 16% of deals, meanwhile, compared to 15% in 2017. Pure refinancing activity dominated in 2017 at 43% of deals, in contrast to this year, when it made up only 24% of newly syndicated transactions.

As for pricing, this remains sensitive to supply/demand dynamics. And following an incredibly busy July, investors could afford to be choosier. This situation was reflected in the monthly pricing figures, with spreads and yields for euro-denominated 'B' category term loan Bs rising slightly, as spreads reached E+398 bps for the three months ended Sept. 30, up from E+385 bps at the end of the second quarter. Likewise, yields rebounded to 4.18% over the same period, compared to 4.04% for the second quarter (see chart 18).

Chart 18

This is despite a slew of recent price tightenings on loan deals and could also be partially explained by the prevalence of M&A transactions in the calendar, with higher spreads needed to entice investors that have to remain unfunded for longer periods of time. Investors in Europe also continue to push for improved ticking fees, while some managers are looking to the bond market to take short-term positions while they wait for M&A loans to fund.

At the moment, the supply/demand balance appears to be mainly driven by CLO issuance, with non-CLO demand the marginal buyer, according to market participants (see chart 20). "Although our investors seem happy, there is not a deluge of new investment into the asset class," said one non-CLO investor. A banker said, "The technicals are much better than in July, with so many CLO warehouses--liquidity is as good as it gets. 'AAA' spreads are tightening, which is giving CLO managers more confidence." (see chart 19).

Chart 19

Chart 20

The main driver for this situation, sources comment, is that competition is increasing among the 'AAA' anchor investors that have remained in the market, with large-ticket accounts ramping up their investments after allocating more cash to deploy--which could in turn exert downward pressure on pricing. There is also understood to be growing interest from investors that have not participated in the last couple of quarters, on the back of wider liability spreads now, say managers. Demand from non-CLO funds looks like it could be improving, too. "Investors have been keener as the inflation and tapering chat has ramped up," said an investor, who notes that throughout the pandemic, investors have stayed put as allocations to the loan market are typically made on a strategic basis, and most players have stuck with the asset class. "Inflows have picked up since the summer, in recognition of the floating-rate nature of loans," she added.

European structured finance volume fell 19% through the third quarter

European structured finance issuance in the first nine months of 2021 was down 19% (see chart 21). Covered bond originations remain near decade lows, however, an influx of volume over the second and third quarter has left covered bonds down just 16%. The securitization market appears to have lost some luster in 2021, after taking off at a fiery pace at the start of 2020 as the market adopted the STS framework outlined by governments.

For securitizations, the $91 billion in new originations in the first three quarters of the year was 23% below the comparable 2020 period. With a region as large and complex as Europe, divergence in originations occurs across both countries and asset classes. RMBS has been suffering, with no originations from France and Italy so far in 2021. However, in the U.K., RMBS added $23 billion in the first three quarters, down just 9% from the comparable 2020 period.

ABS has enjoyed gains in the U.K. and France. European structured credit has proved a bright spot in the U.K., with new CLO originations increasing to $31 billion in the first three months of 2021, carried mainly by traditional CLOs.

As in the U.S., we don't count CLO refinancing and resets in our forecasts or historical trends, but we do keep track of the segment. CLO refinancing and reset volume in Europe grew to $54 billion through September, the highest total on record for any comparable period over the past ten years. CMBS added a slew of originations in the third quarter, bringing the midyear total to $6 billion, about 4x the comparable total in 2020.

Covered bond originations have also diverged as the ECB has injected liquidity into regional economies. Subsequently, the appeal of covered bonds diminished in the face of cheaper funding alternatives offered by the TLTRO III program initiated by the ECB in response to economic pressure from the pandemic. Through the third-quarter, covered bond issuance came to $91 billion, down 23% from the comparable 2020 period. The TLTRO scheme is set to wind down in the second quarter of 2022, which may revive demand in the back end of next year.

Chart 21

Emerging Market Issuance Is Dominated By Unrated Debt From China

Credit spreads in most emerging market regions widened in the third quarter (although spreads in EMEA tightened) and dollar-denominated issuance fell to $98.9 billion from a record $126.7 billion in the second quarter, led by a sharp drop in issuance from Eastern Europe, the Middle East, and Africa (EEMEA). Emerging Asia (ex-China) led all regions, with $42.4 billion of dollar-denominated issuance in the third quarter (down from $44.4 billion in the second quarter). Dollar-denominated issuance in the third quarter totaled $32.1 billion in China (down from $36.6 billion in the second quarter), $17.6 billion in Latin America (up from $11.9 billion), and $6.8 billion in EEMEA (down from $33.9 billion).

Chart 22

Rated emerging market corporate bond issuance in the third quarter remained strong but fell to $43.2 billion, down from the quarterly issuance record of $76 billion in the second quarter, led by a sharp drop in 'AA' issuance from its record level in the second quarter (see chart 23). Investment-grade corporate issuance fell to $34.2 billion and speculative-grade issuance fell to $9 billion, down from $57 billion and $19 billion in the second quarter, respectively. Issuance was strong in just the 'AAA' and 'AA' categories.

Chart 23

Most corporate bond issuances in emerging markets are unrated. In the third quarter, over 90% of issuances in the region were unrated by S&P Global Ratings, and more than three-quarters were unrated debt from China.

Emerging market corporate bond issuance in the third quarter totaled $507.8 billion, down slightly from the record level in the second quarter (see chart 23). China led all regions with $398 billion (up from $383.7 billion in the second quarter). Issuance totaled $80.8 billion in emerging Asia (ex-China), $21.6 billion in Latin America, and $7.4 billion in EEMEA, down from $91.1 billion, $22.5 billion, and $41.7 billion in the second quarter, respectively.

Chart 24

Temasek Financial (I) Ltd topped the list of issuers that issued rated bonds in the third quarter (see table 8). It issued a total of $3.6 billion of senior unsecured notes across two bond offerings.

The Export-Import Bank of China topped the list of all emerging markets issuers in the third quarter (see table 9). It issued a total of $16.8 billion of notes across 11 bond offerings.

Table 8

Table 9

International Public Finance Slows, But Remains Strong

Bond issuance from the international public finance sector through September 2021 totaled $909 billion, down 4.8% from the same period in 2020. Chinese issuers dominate the global total, and their issuance was up 5.6% so far this year. Outside of China, issuance is down 18% through September, with a massive haul in second-quarter 2020 making for a difficult comparison. Excluding China, the majority of issuance typically comes from Canada, Germany, and Japan.

Data on non-U.S. public finance volume is not reliable for determining the true size of overall borrowing, but the numbers can suggest major trends. The four years prior to 2020 recorded the highest issuance volume ever in international public finance, averaging over $633 billion annually, and 2020 exceeded the $1 trillion mark for the first time. As with other sectors, 2020 presents a difficult total to match, although this sector will likely top the $1 trillion mark again.

Structured Finance Issuance Outside The U.S. And Europe Became A Growth Story In Q3

Outside of the U.S. and Europe, securitizations in 2021 have outpaced covered bond issuance through September. Structured finance volume through the first three quarters increased 5%. The growth in issuance is directly related to 11% growth in securitizations, offsetting a 1% decline in covered bonds. Structured finance issuance stood at $138 billion in the third quarter, with $104 billion in securitizations and $34 billion from covered bonds.

Australia led securitization gains, up 95% in the first three quarters of 2021 at $32 billion. Japan reported $55 billion in securitizations through September, Latin America increased securitizations to $5 billion, and Canada hit $6 billion. The majority of covered bond issuance through the third-quarter 2021 was released by Canada with $25 billion, while Australia issued $6 billion in covered bonds.

Related Research

• Can China Escape Its Corporate Debt Trap?, Oct. 19, 2021
• Economic Outlook Asia-Pacific Q4 2021: Growth Slows On COVID-19 And Rising China Uncertainty, Sept. 27, 2021
• Economic Outlook Emerging Markets Q4 2021: Vaccination Progress And Policy Decisions Remain Key to Growth, Sept. 27, 2021
• Economic Outlook EMEA Emerging Markets Q4 2021: Higher Inflation Persists Amid A Stronger Rebound, Sept. 27, 2021
• Economic Outlook Latin America Q4 2021: Settling Into The New Post-Pandemic Normal Of Slow Growth, Sept. 27, 2021
• Economic Outlook Europe Q4 2021: A Faster-Than-Expected Liftoff, Sept. 23, 2021
• Economic Outlook U.K. Q4 2021: Recovery Still On Track, Sept. 23, 2021
• Economic Outlook U.S. Q4 2021: The Rocket Is Leveling Off, Sept. 23, 2021