Chart 1

Table 1

S&P Global Ratings Research expects global bond issuance to contract about 2% in 2022 (see chart 1). The global bond issuance total surprised to the upside in 2021, edging out 2020's breakthrough growth to finish at $9 trillion. A particularly strong fourth quarter led to the 5.6% annual surge, after the year-to-date total fell just over 1% short of 2020's through September.

For 2022, fears have grown that the Federal Reserve could move too quickly, aggressively, or unpredictably in its fight with inflation over the coming months, potentially stymieing growth and earnings and exporting tighter monetary policy abroad. This is the key item markets appear to be watching, but our base-case assumption that interest rates will rise this year without becoming restrictive remains intact at this point.

However, risks have grown in the past three months. Other headwinds are still blowing, including still-high cash balances among larger firms, China's deleveraging policies, difficult comparisons with 2021 totals, and the return to trend economic growth. Geopolitical risks have also grown, and several key elections globally this year could bring more unpredictability.

The Fed Versus Inflation Versus Everything Else

As 2022 kicked off, equity volatility rose, and many bond yields began an upward climb as expectations grew for the Fed's interest rate hikes to become more frequent and front-loaded this year. Additionally, quantitative tightening is now on the table. Markets are expecting the first rate hike in March and at least four total hikes this year, and many have concerns the central bank may push too hard to fight inflation, causing markets to freeze up or--worse--spur an economic slowdown (see charts 2 and 3). In comparison, S&P Global economists currently predict three hikes of 25 basis points (bps) this year, beginning in May.

Chart 2

Chart 3

In our prior forecast, we believed interest rates would rise this year. Since then, as concerns over inflation and the extent of the Fed's response have mounted, Treasury yields have increased. But changes in the federal funds rate do not always result in noticeable, quick, or lasting changes to longer-term private-sector rates (see chart 4).

Chart 4

In fact, in the past two rounds of rate hikes, the 'BBB' secondary yield in the U.S. didn't substantively rise until well after "lift-off" of the fed funds rate began. This is likely because markets for longer-dated debt will wait to see the level of commitment to tightening, as well as the length of the tightening cycle. On the other hand, yields on shorter-dated debt, such as the one-year swap rate, move more closely in step with the fed funds rate. And in some cases, the swap rate will lead--as is the case now. At the end of December, the spread between the one-year swap rate and the fed funds rate was approximately 40 bps, and this is likely to widen in January.

Rate hike expectations are having an impact on U.S. borrowing costs, but one limited to duration effects and Fed balance-sheet holdings (see chart 5). Thus far, only Treasuries' and longer-dated corporate bonds' yields have increased. Treasury yields have widened more, given a large portion of the Fed's Treasury holdings are maturing in the next three years, so market participants that sell theirs ahead of the Fed's unwinding cause an increase in supply.

Meanwhile, the lowest-rated speculative-grade ('BB+' or lower) bond yields have fallen in recent months, supporting S&P Global economists' expectation for solid, if slower, economic growth this year. And even if borrowing costs should rise, they have a long way to go before becoming restrictive, given many have fallen to new lows since the COVID-19 pandemic began.

Chart 5

The worry that Fed rate hikes will lead to higher interest rates abroad, particularly for emerging markets, has largely not materialized yet, though a few countries have increased policy rates, some for reasons specific to the sovereign (see chart 6).

Chart 6

Another headwind to bond issuance this year is China's effort to reduce debt reliance throughout its economy. Chinese issuers account for roughly 24% of global nonfinancial and financial services issuance totals and for over 60% of international public finance issuance since 2016. Attempts to stem debt growth in years past generally had little impact on the issuance totals, but we are still taking a cautious outlook in the year ahead. China's central bank did take marginal steps in 2021 to ease monetary policy, but it is still far away from a loosening stance.

We will also continue to monitor U.S. monetary policy, which has been evolving quickly. Higher interest rates were expected to be a modest speed bump to issuance totals this year, but they could become a larger hurdle depending on how the situation progresses and whether higher rates "spread" to other regions. With this in mind, we view the potential for disruptive changes to expected monetary policy as the key risk to our baseline projections, stretching some of our prior pessimistic ranges lower. That said, in our base case, historically strong expected economic growth and still-favorable--if tightening--financing conditions remain.

Issuance Projections

We expect nonfinancial issuance to decline about 7% in 2022.  Global nonfinancial corporate issuance finished 2021 just shy of $3 trillion, for a 12% decline from 2020's breakthrough volume. This put it solidly in the range we forecast at this time last year, albeit toward the pessimistic end (-14% to -4%). We expect a similar contraction this year as the economic recovery continues amid some challenges. We anticipate a 5%-15% decline in 2022, and risks weigh to the downside once again.

With markets expecting earlier and more frequent rate hikes by the Fed, we expect more issuers will take advantage of these last few months of historically low rates in case market volatility should increase over time. Despite the risk of an overreaction to inflation by the Fed, at this point we do not believe the European Central Bank (ECB) will be hiking rates anytime soon, given more slack in the European labor markets. However, the Bank of England is expected to raise rates several times this year.

Cash balances remain very high among companies we rate investment-grade ('BBB-' or higher), though the pace of investment-grade cash growth slowed in 2021 to just 2.6%. With roughly $3 trillion of cash and short-term securities on their balance sheets, nonfinancials in the U.S. and Europe, the Middle East, and Africa (EMEA) have room to maneuver without as much reliance on debt issuance. However, the $3 trillion is not evenly distributed across issuers, which could limit the risk to issuance somewhat.

Chart 7

We expect China's issuance to moderate again in 2022 after finishing 2021 up 5.5%, from a 19% expansion in 2020. The government continues to encourage a more conservative approach to debt reliance throughout the economy and in particular for the homebuilders/real estate sector, which leads in nonfinancial corporate issuance. This will be an area to monitor as the government balances several policies, such as "zero COVID," "common prosperity," and fiscal discipline, without curbing GDP growth too much. Still, the potential refinancing pipeline in China is huge. Roughly $1.5 trillion face value of bonds will mature between 2022 and 2024, which should offset some of the anticipated impact of deleveraging policies.

Finally, despite some fear of a pulling forward of merger and acquisition (M&A) activity in 2021 to get ahead of unfavorable tax reform in the U.S., the pipeline remains robust, which could provide motive for debt issuance--more so in the first half of the year.

We expect financial issuance to show flat to modest growth in 2022.  Bond issuance by financial services companies in 2021 grew 16% to hit an annual record of $3.07 trillion. In the U.S., strong earnings growth supported a 17% expansion. Earnings growth is likely to slow in 2022 alongside equity market growth--which, together with other factors outside the U.S., could limit overall issuance growth in 2022 to the low single digits.

The M&A pipeline for global financial services also expanded in 2021, particularly in the U.S. Financial services companies were aggressive acquirors in 2021 amid low real interest rates, though some of this activity might have been moved up ahead of potentially less shareholder-friendly tax reform in the U.S. However, with no legislation on this front, 2022 could avoid a stalling of M&A activity, at least in the early part of the year. If the pace can keep up, it may counter our expectation for generally lower issuance in the U.S.

With the ECB's third round of targeted longer-term refinancing operations (TLTRO III) likely to begin phasing out this year, bank issuance in the region may rebound, but issuers will more likely utilize covered bonds, given their typically lower yields. Covered bond issuance and traditional bond issuance by banks are normally negatively correlated, and covered bonds would offer more attractive funding costs for issuers in lieu of TLTRO. Still, cessation of TLTRO III may depend on the course of inflation this year.

Annual issuance growth from China has been especially strong in recent years, with roughly $200 billion increases in both 2019 and 2020, equating to 47% and 35% annual growth rates, respectively. The healthy refinancing pipeline, with over $1.6 trillion of bonds due 2022-2024 (based on face value), could balance against economywide deleveraging efforts. We expect much slower growth in China relative to recent years. Nonetheless, with the U.S. and Europe more likely to show slight declines in issuance, our expectation for an aggregate increase rests on modest Chinese issuance growth.

Global structured finance issuance should grow roughly 3% in 2022.  Structured finance issuance grew a staggering 45% in 2021, to $1.3 trillion, its strongest total since the financial crisis. In 2022, we expect growth in the single-digit range--largely limited by a difficult comparison in 2021--but still a strong total supported by healthy economic growth globally. Because of risks leaning to the downside, the range spans from -5% to 8%.

Structured finance issuance in the U.S. is expected to grow much more slowly in 2022, possibly remaining little changed from last year. Each subsector is poised to report increases or relatively unchanged volume at the end of 2022:

• Asset-backed securities (ABS) issuance should continue to grow, underpinned by elevated used-vehicle values and sales expectations in the near term. Strong private student loan issuance should offset weakening demand for Federal Family Education Loan Program (FFELP) student loans, though perhaps with an overall decline in student loan ABS. More esoteric collateral, such as consumer product and equipment leases, is also supportive.
• Home price appreciation and sales could slow from the heady pace in 2021 but remain supportive of further residential mortgage-backed securities (RMBS) originations, specifically in the nonqualified mortgage sector.
• Commercial mortgage-backed securities (CMBS) issuance returned to 2019 levels in 2021, and in 2022 we expect issuance to be relatively unchanged as the sector shakes off the impact of the pandemic.
• Structured credit origination volume was up 129% in 2021. The leveraged loan market easily hit a full-year issuance record by volume in 2021, at about $789 billion, setting the stage for additional growth in structured credit issuance in 2022.

Despite a strong economic recovery in 2021, European structured finance issuance fell about 3% short of 2020 levels last year. Overall issuance could increase in 2022 on still-strong expected economic growth and a healthy pipeline of collateralized loan obligations (CLOs). European covered bond issuance finished only slightly lower than in 2020 despite credit institutions drawing down large volumes of cheap term funding from central banks, which normally limits covered bond usage. For this year, the ECB's TLTRO III program is set to wind down in the second quarter, leaving room for growth in the second half of 2022.

Outside the U.S. and Europe, we expect issuance to increase only slightly in 2022, after a strong showing in 2021 resulted in a 38% increase. Economic growth is expected to be positive in many regions but subdued in others.

U.S. public finance issuance could increase about 2% this year.  In 2021, U.S. public finance bond issuance fell 2% relative to 2020, coming in slightly better than our baseline expectation from a year ago for a 5% drop.

In 2022, we expect issuance to increase slightly. We assume little support for issuance from government stimulus in an election year with growing inflation fears, but we also expect a negligible impact on the general economy from the omicron wave.

Countering these factors, maturing debt (at face value) has increased nearly 20% for 2022, followed by only slight declines in 2023 and 2024. Refinancing needs may provide a tailwind to issuance this year. As with other asset classes, downside risks predominate, given we expect interest rates to rise somewhat. If the Fed raises rates more than expected and this affects municipal markets, already low-yielding instruments may become less popular.

International public finance could decline slightly in 2022.  A strong haul in the fourth quarter led international public finance issuance to finish the year with a total of $1.2 trillion. Once again, China dominated the total, with 72%.

As with other sectors, the course of debt reduction policies in China is key to our 2022 assumptions, and we will be adjusting our forecast as necessary. Outside of China, coupon rates remain historically low, favoring borrowers and encouraging more issuance, but there is the risk that the Fed will export higher interest rates to emerging markets this year. Global economic growth prospects are still strong but lower than the growth seen in 2021.

2021 summary

Global bond issuance in 2021 totaled $9 trillion, a surprising upturn of 5.6% for the year after being down 1% through the third quarter. A majority of sectors finished ahead of 2021 totals. Global structured finance led (up 45%), followed by financial services (up 16%) and international public finance (up 6%). Meanwhile, U.S. public finance and global nonfinancials were down 2% and 12%, respectively. These figures cover only long-term debt (maturities greater than one year) and exclude debt issued by supranational organizations. All references to investment-grade and speculative-grade debt refer to issues rated by S&P Global Ratings.

U.S. Financing Conditions Remain Exceptionally Favorable--For Now

Despite recent widening of Treasury yields, funding conditions in the U.S. remain accommodative, even as markets have priced in four or more 25 bps hikes in the fed funds rate and quantitative tightening in 2022.

Funding conditions in the U.S. this year will largely depend on inflation as the Fed tightens policy in response to readings of inflationary pressure. Meanwhile, monetary policy can do little to remedy supply-chain issues, but with the U.S. labor market quickly tightening, higher wages may cause even more inflationary pressure from the demand side.

We expect monetary policy tightening will be measured and gradual, but the Fed could also take more aggressive actions that would tip financing conditions into restrictive territory. With the Fed preparing to remove monetary accommodations, financial conditions will be tighter in 2022. However, our base expectation is that funding conditions in the corporate bond market will remain supportive to neutral this year.

Thus far in 2022, investors have remained supportive of speculative-grade bonds amid the volatility in Treasury and equity markets, with the five-year speculative-grade spread at 335 bps as of Jan. 14, 2022, down 22 bps from third-quarter-end and marking its lowest level since 2018. Meanwhile, the 10-year investment-grade spread, at 108 bps, has widened 9 bps since the end of the third quarter but remains near the lows following the global financial crisis (see table 2).

Along with short- and intermediate-term Treasury yields, primary market corporate yields for speculative-grade and investment-grade bonds both rose in the fourth quarter. But investment-grade and speculative-grade corporate yields remained accommodative at the end of the fourth quarter, with room to rise further before reaching restrictive territory.

Table 2

Another record year for U.S. speculative-grade bond issuance

For the second straight year, U.S. speculative-grade corporate bond issuance surged to a record, reaching $385.7 billion, as strong demand for credit amid the sharp economic recovery and extraordinarily easy financial conditions continued to fuel investors' search for yield. The weakest-rated U.S. issuers took advantage by pushing out maturities and lowering financing costs in 2021.

'B' and 'CCC' category bond issuance reached annual records of $156.8 billion and $47 billion, surpassing previous highs set in 2012 and 2013, respectively. The 'BB' category also had strong issuance, totaling $181.9 billion, just below the record set in 2020. Speculative-grade bond issuance in 2020 and 2021 combined totaled $732.5 billion--29% more than the next-highest two-year period (2012-2013).

While not record-breaking, U.S. investment-grade corporate issuance was strong in 2021. The 'BBB' and 'A' categories led with $572 billion and $381 billion, respectively. About three-fifths of investment-grade issuance came in the first half of the year, with issuance slowing in the fourth quarter to $199.1 billion. The 'BBB' category, with $121.2 billion, was the only investment-grade category with strong issuance in the fourth quarter.

Chart 8

The year saw strong speculative-grade corporate bond issuance in sectors severely hit by the 2020 recession (consumer products, oil and gas, media and entertainment, retail and restaurants, and transportation), in a reflection of both the strong economic recovery and extraordinarily accommodative financial conditions. However, the largest issuers in the fourth quarter were almost exclusively from the banks and brokers and health care sectors (see table 3).

Table 3

U.S. leveraged loans break a record

U.S. total loan supply surged to more than $780 billion in 2021, shattering the high of $650 billion from 2017, with institutional supply also beating its 2017 record at $615 billion (from $503 billion). Even categories that did not make it into record territory still hit multiyear highs: Leveraged buyout (LBO) issuance was the second highest on an annual basis, while refinancing hit a four-year high. Meanwhile, issuance from companies rated in the 'B' category, at $444 billion, crushed the prior high-water mark of $334 billion (see chart 9).

Chart 9

And with plentiful unspent capital at private equity firms meeting exceptionally low funding costs in 2021 (the average yield to maturity of new-issue LBO loans fell below 5% for the first time ever), sponsored companies showed a record $240 billion--19% higher than the previous record. LBO issuance itself was $146 billion, just 9% shy of the $160 billion high from 2007 (see chart 10).

Chart 10

On the demand side for loans, the CLO market had a record-setting run with issuance of $187 billion, 45% higher than the high of $129 billion from 2018. Inflows into loan mutual funds and exchange-traded funds swung to $33.9 billion in 2021, based on Lipper's weekly reporters, from $19.6 billion of outflows in 2020. S&P Global Market Intelligence's Leveraged Commentary & Data (LCD) estimated $46.8 billion of demand from retail funds in 2021 (including monthly reporters). Combining this with CLO issuance, total measurable demand was a whopping $233.5 billion, the highest reading since LCD began tracking the data 20 years ago.

Surging investor demand opened the door for borrowers and sponsors to take advantage of a favorable financing market for opportunistic transactions. Dividend recapitalizations rocketed to an all-time high of $82.2 billion in 2021, more than double the $35 billion output from 2020. Sponsored issuers accounted for $69.9 billion of that supply, or 85% of the total. But M&A was still the primary focus of 2021, with issuance soaring to a high of $331 billion, far outpacing the 2018 full-year record of $275 billion (see chart 11).

Chart 11

A record number of borrowers raised M&A-related financing in the leveraged loan market last year, and the size of transactions has increased. In 2021, 436 borrowers tapped the loan market to fund a buyout, acquisition, or merger--the highest total ever, exceeding the prior peaks of 427 issuers in 2007 and 421 in 2018. The 2021 count was more than double the 2020 tally (216 issuers), which was a nine-year low.

In the primary market, demand for these loan assets meant the ratio of downward to upward price flexes peaked at 9x in the first quarter. That moderated over the following three quarters but still tilted in issuers' favor throughout the year. With that, new-issue spreads and yields to maturity remained low. The average spread on institutional loans from 'B'/'B+' rated issuers held under 400 bps for most of the year, closing December at 396 bps, and was as low as 355 bps in January 2021. Likewise, the yield to maturity for this cohort held under 5% in every month but April (see chart 12).

Chart 12

On the secondary side, insatiable investor demand propelled the S&P/LSTA Leveraged Loan Index to a robust 5.2% gain in 2021, up from 3.1% in 2020 and a 4.9% annual average since the end of the global financial crisis. In addition, the market value component of total return, which measures the change in secondary prices, was up 1.07% in 2021, versus a 1.77% loss in 2020 and a negative 0.03% average over the last 12 years (see chart 13).

Chart 13

U.S. public finance issuance fell only slightly in 2021

U.S. municipal bond issuance in 2021 was $475 billion, down from $485 billion in 2020. Issuance in the fourth quarter was $114 billion, down from $125 billion in the third quarter and lower than the $130 billion in the fourth quarter of 2021. Nonetheless, this was the second-highest annual total for munis and still very close to 2020's record pace (see chart 14).

Chart 14

New money issuance rose to 66% of all U.S. public finance issuance in 2021 from 57% for 2020, while refunding fell to 23% from 31% and mixed-use issuance fell to 11% from 12% (see chart 15).

Chart 15

December saw a bumper crop of large issues, with six over $1 billion (see table 4). The three largest individual issues in December were from Golden State Tobacco Securitization Corp., with $4.2 billion; the New York State Dormitory Authority, with $2.5 billion; and the Bay Area Toll Authority, with $1.3 billion.

Table 4

For 2021, California issued the most debt, with $86 billion, up 21.9% from 2020. New York was second with $52.1 billion, down 12.6% from 2020 (see table 5).

Table 5

U.S. structured finance nearly reached $800 billion in 2021

U.S. structured finance issuance reported its highest quarterly total in the past 11 years in the fourth quarter of 2021, with $246 billion, taking full-year 2021 volume to $780 billion (see chart 16). This exceeded every full-year total since the global financial crisis. Each subsector reported double-digit growth compared with 2020, and RMBS and structured credit more than doubled their 2020 totals.

New-issue CLO originations finished up 129% in 2021, to $210 billion. 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 also saw increased demand for both new-issue CLOs as well as refinancings and resets in 2021. Credit metrics have been accommodating, with 'CCC' rated loans becoming less prevalent in portfolios, though the share of 'B-' credits has steadily grown.

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 2021, CLO refinancings and resets rose to $203 billion--an all-time high. Precipitous spread tightening over the past 18 months has played a role in the historic volume as managers refinance and reset existing bonds at lower cost.

U.S. ABS issuance rose 46% in 2021, to $277 billion. Auto ABS still contributes the largest portion to the ABS total and reached $116 billion, easily a 10-year high. The student loan ABS sector had a busy year with $28 billion. At the beginning of the year, private collateral, rather than FFELP loans, dominated student loan ABS, but by year-end, the number of FFELP originations had increased, leading to a total of $15.6 billion.

Chart 16

U.S. RMBS originations more than doubled from 2020 to $197 billion, dwarfing every annual total since 2010. This was split between prime jumbo loans, at $114 billion, and RMBS "other" (which consists mostly of nonperforming loans, seasoned loans, and credit risk transfers), at $82.6 billion. We expect demand for new and existing home sales to remain elevated, supporting new originations.

U.S. CMBS originations also had a banner year, falling just short of $100 billion. Commercial spaces are no longer a high risk to the vaccinated population and have finally reopened in a limited capacity. We expect healthy CMBS issuance to continue in line with the reopening of the U.S. economy.

Financing Conditions In Europe Should Remain Accommodative For Longer

Funding conditions in Europe remain accommodative, even as the Bank of England surprised markets with its 15 bps rate hike in December as it prepared to head off rising inflation. Markets are pricing in four additional 25 bps rate hikes from the Bank of England in 2022.

Meanwhile, the ECB is expected to end its pandemic emergency purchase program (PEPP) in March but announced that it will double asset purchases under its asset purchase program to €40 billion per month beginning in second-quarter 2022 to ease the transition as the PEPP ends. Markets are also pricing in two 10 bps hikes in the ECB deposit rate in the second half of the year. However, we do not expect the ECB to begin raising rates until 2024, given wage inflation appears well contained in the eurozone.

At the end of the fourth quarter, European high-yield spreads had widened 27 bps from the end of the third quarter but remained accommodative at 331 bps. Primary market corporate yields for speculative-grade and investment-grade bonds also both ended the year in supportive territory (see table 6).

Conditions remain supportive for European corporate bond issuance in 2022, with the omicron wave of COVID-19 unlikely to derail the recovery and with monetary policy expected to remain accommodative in Europe for longer than in the U.S. However, as markets are anticipating tighter monetary policy in Europe, investor demand for fixed-rate corporate bonds could drop and threaten issuance, though this may support variable-rate bonds and leveraged loans, particularly in light of expectations for continued above-average economic growth this year.

Some inflation risk exists in Europe, but headline inflation has not yet reached the same levels as in the U.S., and a larger proportion of increasing prices owes to rising energy costs. That said, with increased tensions between Russian and Ukraine, geopolitical risk is rising, which could spur sanctions and retribution, keeping energy prices higher for longer, given the Europe's reliance on Russian natural gas.

Table 6

European speculative-grade bond issuance surges to a record

European speculative-grade corporate bond issuance surged to a record €187.8 billion in 2021--23% higher than the previous high from 2017--as easy financial conditions continued to fuel investors' search for yield and the economic recovery regained momentum following a second round of lockdowns. The weakest-rated European issuers took advantage by pushing out maturities and lowering financing costs. 'BB', 'B', and 'CCC' category bond issuance reached annual records of €101.8 billion, €75.4 billion, and €10.5 billion, respectively.

European investment-grade corporate bond issuance was middling in 2021, with €628.6 billion. The 'BBB' category was the only rating category with strong issuance, at €322.5 billion, just below the record set in 2020. About three-fifths of investment-grade issuance came in the first half of the year, and issuance was essentially flat from the third to the fourth quarter. In the fourth quarter, investment-grade issuance totaled €132.8 billion, and only the 'BBB' category had strong issuance, with €77.6 billion.

Chart 17

Following record issuance in 2020, rated nonfinancial bond issuance was also middling in 2021, at €270.3 billion. Strong issuance in homebuilders/real estate (with a record €41.5 billion) and the forest products and building materials sector led, amid surging demand for housing and shortages in building materials.

Rated European financial bond issuance was strong in 2021 with €546.1 billion, led by banks with €284.8 billion and brokers (which include special-purpose entities or debt-issuing vehicles) with a record €135.5 billion. The insurance sector also had near-record issuance, with €19.6 billion.

Table 7

European leveraged loans also reached an annual high

It was a record-breaking year for leveraged loans in Europe as well. Institutional loan volume reached €111.7 billion, just topping 2007's €111.1 billion (although total loan volume still lagged that year) (see chart 18).

Chart 18

Loan investors in Europe benefited from solid income and very little volatility in 2021. The S&P European Leveraged Loan Index (ELLI) paid investors 4.81% (excluding currency) for the year, with every month of 2021 showing a positive overall return. Indeed, the year ended on a long positive streak, with December the 21st consecutive month to register a positive reading (see chart 19).

The 2021 return for the index was more than 2% above the 2.74% return recorded in 2020--even surpassing 2019's 4.50%, which was the highest such return since 2016 (at 5.73%). Unlike in the initial drop after lockdowns in March 2020, European leveraged loans have broadly been immune to the patches of volatility that since hit bonds, and returns on the asset class outpaced both the investment-grade and speculative-grade fixed-income markets.

Chart 19

In the fourth quarter, jitters over the spread of the omicron variant failed to unsteady the poise of European leveraged loans, but they did call an early end to big-ticket buyout activity for 2021 (see chart 20). Existing add-on borrowers soon stepped up to take advantage of demand, and--helped by a strong run from October--the quarter delivered a respectable volume of €22.5 billion, albeit still the lowest of the year.

Chart 20

The average European deal size across both bonds and loans has increased steadily since 2012 and is now well above the pre-pandemic high of $739.8 million, reaching $856 million by the end of 2021. These increases have not just come through a small number of "super jumbo" transactions, either. Jumbo deals accounted for 20% of total volume in 2021, which is the largest percentage for any year since 2008, and smaller deals are becoming less common in Europe, with loan tranches of below €499 million making up 41% of supply in 2021. This is the lowest such proportion on record, while deals below €250 million accounted for just 8% of the market last year, well below the low of 15% set in 2020 (see chart 21).

Chart 21

M&A-driven supply dominated 2021 European loan issuance, accounting for €68 billion, or 61% of total institutional issuance (see chart 22). This is the most M&A-fueled activity since 2007 and highlights the difference between 2021 and 2017 (the last time institutional volume passed €100 billion), when M&A-driven activity accounted for only 41.1% of institutional loans.

Chart 22

However, borrowers still took advantage of market liquidity for opportunistic deals, with dividend recap transactions accounting for 16.1% of institutional volume--again, the highest such total since 2007. This equates to issuance of roughly €18 billion, which is on par with the €18.4 billion of dividend recap volume from 2007 (16.9% of total institutional volume).

With the recent surge in CLO issuance (total priced CLO new issuance reached a record €38.6 billion for full-year 2021), in November demand for European loans outpaced supply by the largest margin (at €14.1 billion, on a rolling-three-month basis) since LCD began tracking this data in 2013. LCD calculates net supply by tracking new issues into the ELLI minus repayments. In December, a supply shortage remained, albeit at a much lower shortfall of €3.7 billion.

It was therefore somewhat surprising that as demand for assets swelled, loan spreads and yields ended the year higher than at the end of the third quarter, at E+423 and 4.45%, compared with E+396 and 4.15%, respectively. This points to the fewer inflows into non-CLO funds in Europe, which typically add to demand for the leveraged loan asset class and are not factored into LCD's supply-demand figure because of poor visibility into these flows publicly. Investor sources have told LCD inflows into these funds have picked up since the summer, but for most of 2021, new demand from these investors was flat.

European structured finance volume recoups earlier losses to finish the year strong

European structured finance issuance in the first nine months of 2021 was down 13%, but after a strong fourth quarter, the gap closed to only a 2% deficit (see chart 23). The securitization market finished down for the year at $156.8 billion, but this was still a solid total, similar to 2018's $157.5 billion and just about at the midpoint of the historically high range set after 2017, which averaged $155.7 billion. Covered bonds came in at $139.5 billion, roughly $2 billion short of last year's total.

In a region as large and complex as Europe, divergence in originations occurs across both countries and asset classes. The drop in RMBS owes almost completely to a massive decline in Spain, which had only $1.9 billion in issuance in 2021, down from $15.8 billion in 2020. On the other hand, RMBS issuance in the U.K. rose to $33.5 billion from $26.1 billion.

Within ABS, declines again stemmed from Spain but also Italy, in contrast with a proportionate increase in the U.K. Last year showed an overall decline in ABS volume to $46.5 billion from $50.5 billion. European structured credit also showed gains in the U.K., helping push new CLO originations to $50 billion in 2021, carried mainly by traditional CLOs.

As in the U.S., we don't count CLO refinancings and resets in our forecasts or historical figures in Europe, but we do monitor resets when considering financing conditions. And financing conditions--particularly CLO liability spreads--were favorable in 2021: CLO refinancing and reset volume in Europe handily set a record, finishing the year at $71 billion, up from 2017's high of $29.5 billion. CMBS saw the largest rebound in 2021, rising over 211% to $8.8 billion, though this is easily the smallest subsector within European structured finance.

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. However, with the higher likelihood that TLTRO III will begin to wind down later this year, covered bond issuance finished 2021 relatively strong, at $137.6 billion, compared with $139.5 billion in 2020. Given attractive rates for borrowers, covered bond issuance will likely grow in 2022.

Chart 23

Mixed Financial Conditions In Emerging Markets

Emerging market spreads tightened marginally in the fourth quarter, led by the Asia region, which tightened 33 bps. However, spreads in the Latin America and EMEA regions widened 20 bps and 25 bps, respectively.

These movements coincided with divergence in monetary policies. The Latin America and EMEA regions tightened policy, while policy in the Asia region broadly remains accommodative; the People's Bank of China took several steps to begin easing policy in the second half of 2021. In 2022, the Latin America and EMEA regions appear most vulnerable to tighter U.S. monetary policy (see "Emerging Markets Monthly Highlights: Another Difficult Year Is Ending, Challenges Remain").

Chart 24

Dollar-denominated emerging and frontier markets corporate bond issuance reached an annual record in 2021 at $360.2 billion, marking the third straight record-setting year for this issuance. Issuance denominated in dollars was strong in all emerging and frontier markets regions, led by China with a near-record $122.1 billion and Asia-Pacific (excluding China) with a record $119.3 billion.

Rated emerging and frontier markets corporate bond issuance reached an annual record as well, with $185.7 billion. The Asia-Pacific (excluding China) region led with $55.5 billion, followed by EMEA with $47.8 billion, Latin America and the Caribbean with $47.8 billion, and China with $34.6 billion.

All speculative-grade rating categories showed strong issuance, and overall speculative-grade bond issuance reached an annual record with $62.8 billion. Within investment-grade, the 'AAA', 'A', and 'A' rating categories had strong showings, and investment-grade bond issuance reached $122.9 billion for the year, just below the annual record set in 2020.

Chart 25

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

All emerging and frontier markets corporate bond issuance, including unrated issuance, reached an annual record with $2.1 trillion in 2021, the third consecutive record-setting year. Issuance gained momentum after the first quarter, then stayed relatively flat for the remainder of the year. China led with a record $1.6 trillion, followed by Asia-Pacific (excluding China) with a record $239 billion, EMEA with $121.1 billion, and Latin America and the Caribbean with $85 billion.

Chart 26

Table 8

Table 9

China Leads A Strong Fourth Quarter For International Public Finance

After coming in roughly 5% lower in the year to date through September, international public finance issuance finished the year up 6%, going from a deficit of $24 billion to a surplus of $68.5 billion over 2020. Chinese issuers dominate global international public finance, accounting for 72% of the 2021 total; total Chinese international public finance issuance has grown 22% since 2020.

Outside of China, issuance was down 20% in 2021, with all of the largest countries showing sizable drops. 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, only to be eclipsed by 2021 at $1.2 trillion.

Structured Finance Issuance Outside The U.S. And Europe Hits Breakthrough Levels

Outside of the U.S. and Europe, total structured finance volume was up 38%, breaking through the $200 billion mark for the first time at $218.5 billion. Both securitizations and covered bonds increased over 36%, with both subsectors hitting annual highs: Covered bonds came in at $57.4 billion, while securitizations finished 2021 with $161.1 billion.

Most regions had issuance totals in line with their 2019 levels, though Latin America was still lower ($6.6 billion versus $8.5 billion). Meanwhile, the jump in covered bond issuance stemmed almost entirely from Canadian issuance rising $14 billion to $35.8 billion. Australia rounded out the total with $11.5 billion in covered bond issuance, up from $9 billion in 2020.

Related Research

• U.S. Economic Roundup: Tight Job Market Allows For More Fed Tightening, Jan. 10, 2022
• Economic Outlook EMEA Emerging Markets Q1 2022: High Inflation And COVID-19 Threaten To Slow Recovery, Nov. 30, 2021
• Economic Outlook Emerging Markets Q1 2022: Recovery Isn't Yet Complete While COVID-19 And Inflation Risks Remain Front And Center, Nov. 30, 2021
• Economic Research: Eurozone Economic Outlook 2022: A Look Inside The Recovery, Nov. 30, 2021
• Economic Research: Economic Outlook U.K. Q1 2022: Onward And Upward, Nov. 30, 2021
• Economic Outlook Latin America Q1 2022: High Inflation And Labor Market Weakness Will Keep Risks Elevated In 2022, Nov. 29, 2021
• Economic Outlook U.S. Q1 2022: Cruising At A Lower Altitude, Nov. 29, 2021