Chart 1

Table 1

S&P Global Ratings Research expects global bond issuance to contract about 4.9% in 2022 (see chart 1).   We previously raised the possibility that the Federal Reserve could raise interest rates more quickly than expected in response to inflation, and after one quarter, it appears most market participants and members of the Fed's Federal Open Market Committee (FOMC) agree. Interest rates have risen rapidly thus far in 2022, and bond issuance has so far had mixed responses, depending on the sector.

Quickly rising rates combined with the unpredictability of the Russia-Ukraine conflict are the main drivers behind our lowered issuance forecast compared to last quarter. Given still-high unpredictability on both fronts, as well as other potential stressors such as increasing COVID-19 cases in China--which could exacerbate supply chain disruptions and subsequent inflation--we have also widened our forecast ranges to the downside.

A Complicated Backdrop Cuts Into Expectations

Markets got off on the back foot in 2022 after the minutes from the FOMC's December meeting were released on Jan. 5. The minutes hinted at faster interest rate increases than previously conveyed, as well as the first mention of possible quantitative tightening ahead. Interest rates across all asset classes and corporate bond spreads rose immediately after, with a stronger response from benchmark rates and investment-grade corporate debt (see chart 2). On Feb. 24, market rates increased again in response to Russia's invasion of Ukraine. Given possible political and economic spillovers, the conflict could complicate things for central banks' fight against inflation moving forward.

Chart 2

Rates in Europe have been rising as well, with the yield on the 10-year German Bund solidly in positive territory, at 82 basis points (bps) as of April 18, from -21 bps at the start of the year. Benchmark yields have also risen more than those on investment-grade corporate bonds, which in turn have seen yields increase faster than speculative-grade bonds (see chart 3). Because of the widespread reaction across credit quality, we do not at this time take this as a signal of an impending recession, but more of an across-the-board repricing of risk in line with duration. This is in response--primarily--to tighter monetary policy ahead.

Chart 3

In most cases, yields in secondary markets are now back to their pre-pandemic levels, leaving behind the historically ultra-low yields of mid-2020 to 2021. Quickly rising borrowing costs have kept corporate bond issuance limited in the first quarter, especially for nonfinancials. We feel that the pace of interest rate increases will eventually slow or level off, which could be followed by issuance normalizing.

Based on the CME's FedWatch tool, markets expect the fed funds rate to reach roughly 250 bps-275 bps by the end of the year, around the level considered "neutral" (see chart 4). This is up markedly from the 75 bps-100 bps anticipated at the start of 2022. Once the Fed's December minutes were released, the pace of expected hikes increased quickly, then slowed and briefly reversed as the Russia-Ukraine conflict unfolded, perhaps on the belief that the conflict would put a dent in global GDP, allowing central banks to ease up on rate increases. However, once Ukraine announced that it would not seek membership in the North Atlantic Treaty Organization (NATO) in the first week of March, markets expected even faster increases by the Fed before settling on 250 bps-275 bps.

Chart 4

Thus far, interest rate volatility and rising geopolitical risks have had a mixed impact on bond issuance across sectors (see chart 5). Notably, global nonfinancial issuance has fallen by 30%, while international public finance increased 31%. The only country to see an increase in issuance among international public finance was China, whose investor base is largely limited to domestic participants, allowing for less interest rate volatility relative to the rest of the world. In this sense, outside of a strong showing by structured finance (which benefited from comparison to a weak first-quarter 2021), issuance was largely weaker relative to last year.

Chart 5

Ultimately, we believe higher rates, volatility, and event risk will cause issuance to fall short of 2021 levels across most asset classes.   Although markets have been front-running policy rate increases via yields on government and corporate bonds, if the median expectation for another 200 bps-225 bps of increases in the fed funds rate proves true by year-end, this may imply some room for benchmark and corporate yields to rise further. 2018 was the last time markets faced a geopolitical stressor that investors feared could disrupt the global economy while also facing concerns about the future course of monetary policy: the U.S.-China trade dispute was in full swing and markets were calling on the Fed to lower interest rates while it was involved in a tightening cycle and balance sheet reduction. Global bond issuance fell 5.8% in 2018.

Issuance Projections

We expect nonfinancial issuance to decline about 12% in 2022.  Global nonfinancial corporate issuance was the hardest hit sector in the first quarter, falling 30% relative to 2021. With interest rates still rising, it may take some time for markets to find their new "normal," where issuers feel comfortable coming back to a more typical pace of issuance or make up for lost time, particularly in developed regions. Investors also appear apprehensive to buy in the current environment, and globally, roughly 85% of all nonfinancial bond issuance that comes to market has been with fixed or zero coupons. Because of this, we've lowered our base case from the first quarter to reflect a 12% decline in nonfinancial issuance in 2022. For now, we anticipate some pick-up later in the year to close the gap from the first quarter, but because of heightened uncertainties, we've also widened the downside range to a possible 25% contraction this year.

Lower first-quarter issuance relative to last year, high cash balances of rated issuers across all regions, and low refinancing needs in the immediate term could reduce the need to issue debt during this period of volatile borrowing costs.

After months of sustained higher activity through 2021, the global nonfinancial mergers and acquisitions (M&A) pipeline has started to retreat over the last three months (see chart 6). In terms of the volume of new transactions announced, March's $246 billion represented a 45.5% decline from December's $451 billion and a 37% decline from the monthly average of $389 billion in 2021. This decline arguably reflects increased market volatility and indicates lower issuance volumes ahead. (Here we define nonfinancial M&A based on the sector of the target company.)

Chart 6

We expect China's issuance to moderate in 2022 after finishing 2021 up 5.5%, after a 19% expansion in 2020. Through the first quarter, Chinese issuance was down 2.7%, the first decline in the first quarter since 2017, and in contrast to the 15% compound annual growth rate seen since then. Perhaps unsurprisingly, this decline was led by a reduction in issuance by the largest sector: homebuilders/real estate, which fell 27% relative to last year. The government has encouraged a more conservative approach to debt reliance throughout the economy and for this sector in particular. 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. As a positive offset, the potential refinancing pipeline in China remains large. Roughly $1.57 trillion face value of nonfinancial bonds will mature from 2022-2024, which should help China maintain strong issuance totals this year.

We expect financial issuance to show flat to modest growth in 2022.  Bond issuance by financial services companies in the first quarter grew about 2% relative to last year, and we generally expect this pace to continue through year-end, with a possible range of -5% to 5%.

Similar to nonfinancials, the M&A pipeline for global financial services generally contracted in the first quarter as well, though not to the same extent. Rising rates have arguably not hampered banks from issuing as much as nonfinancial corporates--helped in part by the use of net interest margins. That said, we expect bank earnings growth to slow this year after a strong 2021, particularly in the U.S. Solid earnings growth among U.S. banks supported issuance last year, and though slowing or falling, this is still being partially offset by the very large reserve balances that banks hold at the Fed, which allow for some flexibility. Issuance should find some marginal support from slightly higher total loss-absorbing capacity requirements as of Jan. 1, 2022.

With the European Central Bank's (ECB) third round of targeted longer-term refinancing operations (TLTRO III) likely to begin phasing out this year, bank issuance in the region may rebound. Issuers will more likely use covered bonds, given their typically lower yields, and this has arguably already started. Covered bond issuance and traditional bond issuance by banks are normally negatively correlated, and covered bonds would offer more attractive funding costs for issuers given TLTRO.

Annual issuance growth from China has been especially strong in recent years, with roughly $200 billion increases in 2019 and 2020, and another $163 billion in 2021; annual growth rates of 49%, 35%, and 19.5%, respectively. China's issuance is off to a strong start in 2022, up 24%. The healthy refinancing pipeline, with over $1.67 trillion of financial bonds due 2022-2024 (based on face value), should limit any downside from rising global market volatility or leverage clampdown efforts.

Global structured finance issuance could decline about 7%.   Following 2021's post-global financial crisis issuance record of $1.3 trillion, global structured finance issuance continued that momentum in the first quarter with $370 billion in issuance, representing a 49% year-over-year increase. Despite the substantial improvement, rising interest rates, heightened inflation, and geopolitical conflicts in the first quarter have shifted our issuance expectation toward the downside for the sector. The first-quarter growth rate is also arguably biased, based on a relatively weak comparable from first-quarter 2021. And while we do expect there to be issuance implications, we believe the overall impact of the Russia-Ukraine conflict on global structured finance will be limited from a credit perspective (see "S&P Global Ratings Expects The Russia-Ukraine Conflict To Have Limited Direct Impact On Global Structured Finance," March 3, 2022).

We've lowered our structured finance issuance forecast to -7%, with a range of -12% to -2% based on these concerns. Since last quarter, our economists have lowered their GDP growth projections , which should result in lower issuance for structured finance, generally. However, recession odds are still limited, and with some support from strong first-quarter issuance, we expect the 2022 total to remain well above $1 trillion, albeit lower than last year. This downward expectation reflects mixed results across sectors and subsectors, with some seeing modest declines while others may remain flat or outperform last year's volume.

Surprisingly, first-quarter structured finance issuance came largely from outside the U.S. and Europe, with the rest of the world posting a 96% increase year-over-year. Meanwhile, Europe and the U.S. grew 47% and 36%, respectively, compared to last year's pace. While the U.S. represented nearly two-thirds (61%) of the global structured finance market in 2021, the covered bonds sector (which is not prominent in the U.S.) can largely explain the substantial increase in issuance in Europe and the rest of the world. The main driver for this is accommodative monetary policy allowing for relatively cheap funding for lenders to issue these debt securities. That said, we expect the pace of covered bond issuance to slow as the year progresses and central banks begin to tighten policy to more aggressively tackle inflation.

With the U.S. representing such a significant portion of the global structured finance market, we expect this region to contribute most of the year's modest decline. However, some sectors, such as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), have been resilient to the aforementioned pressures on overall issuance through the first quarter. We anticipate U.S. asset-backed securities (ABS) will erase the slight gain made through March, and collateralized loan obligations (CLOs) will trail last year's pace through the remainder of the year. Even so, these comparisons are against a post-great financial crisis record in 2021, and 2022 will likely end higher than 2019 levels.

We also expect new issuance outside the U.S. and Europe to show modest growth considering its year-over-year gains to start the year. While covered bond issuance will likely trail off, RMBS and ABS issuance in Australia and Japan will continue to drive any growth.

U.S. public finance issuance could decline about 7% this year.  Heightened market volatility and rising interest rates appear to have had an impact on U.S. public finance issuance in the first quarter, which fell 16% relative to first-quarter 2021. This is less than the 30% relative decline in global nonfinancials but is the second-largest decline by asset class.

This decline will likely linger, keeping the 2022 total roughly 7% lower than 2021. The potential negative impacts of future COVID-19 variants should likely be less consequential to economic activity and therefore sales tax revenue this year, but as with many other sectors, we expect issuance to stay below typical levels until yields stabilize. Many states and municipalities also possess large surplus funds left over from federal support through the last two years, which should provide a fallback for states.

International public finance issuance may see a marginal decline.  Of all asset classes, the least likely to feel the impact of higher policy rates and the Russia-Ukraine military conflict is international public finance. However, that is only because Chinese issuers are now accounting for even more of the total (80% in first-quarter 2022, versus 72% in all of 2021). Despite national policies aimed at reducing debt, we expect refinancing needs to keep Chinese issuers' totals strong this year. And Chinese debt markets are generally limited to domestic lenders with very little foreign involvement, in effect shielding issuers from quickly rising rates across the rest of the globe.

Conversely, issuance from the rest of the world contracted 42% relative to first quarter 2021. In fact, no other country saw an increase relative to the same period in 2021, while China's total more than doubled. Ultimately, 2021's record total was supported by strong quarterly totals later in the year, which may be hard to beat. We project issuance to see a slight decline of 1.5% for the full year.

First-quarter summary

Global bond issuance in the first quarter totaled $2.2 trillion, down 3.7% from the same point in 2021. Large declines were seen in nonfinancials (down 30%) and U.S. public finance (down 16%). These were partially offset by gains among structured finance (up 49%) and financial services (up 1.8%). 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 Are Shifting Into Neutral Territory

The first quarter was marked by heightened volatility in financial markets, fueled by the repricing of monetary policy assumptions and the beginning of the Russia-Ukraine conflict. Funding conditions in the U.S. remain broadly accommodative in April, but we expect further tightening will push conditions into neutral this year.

With a tight labor market and inflation at multi-decade highs, the Fed has quickly changed forward guidance, and S&P Global economists now see a total of six rate hikes in 2022, including a 50-bp hike in May, and four or five more hikes in 2023. Our economists see risk tilted toward even more tightening, and additional 50-bp rate hikes as an increased possibility. Balance sheet reduction could begin as early as May, with minutes from the March FOMC meeting revealing that participants are considering reducing the balance sheet by as much as $95 billion each month, phased in over a period of three months or more.

This shift in policy has sent market benchmark rates soaring this year, with U.S. two-year and 10-year yields rising by more than 170 bps and 130 bps, respectively, year-to-date. As market benchmark rates have surged, primary and secondary market corporate bond yields now reflect more neutral conditions. The flat shape of the U.S. yield curve suggests it could invert further sometime in late 2022 or 2023.

The Russia-Ukraine conflict added to volatility in the first quarter, leading 10-year investment-grade and five-year speculative-grade spreads to widen as much as 41 bps and 57 bps, respectively, from the start of the year. The 10-year investment-grade corporate spread remained more neutral in April, but the five-year speculative-grade spread topped out at 408 bps during the quarter and is currently tighter than where it began the year.

Loan and equity markets also largely reflected similar patterns in stress during the first quarter, with loan spreads rising to more neutral levels through March. However, demand for yield persists as the proportion of covenant-lite issuance remains dominant, and the loan distress ratio dipped below 2%.

Table 2

U.S. bond issuance slows noticeably from a record pace

Rated U.S. corporate bond issuance for the first quarter slowed from the record pace seen over the past two years but remained strong, with the 'A', 'BBB', and 'CCC'/'C' rating categories each seeing strong issuance. The bulk of 'CCC'/'C' category issuance came in January, before slowing in both February and March. Over half of first-quarter issuance was rated in the 'BBB' category, with a surge of issuance in March that accounted for nearly two-thirds of the category total. Nearly half of rated corporate bond issuance during the quarter came in March, and nearly two-thirds of issuance in March came ahead of the FOMC policy decision on March 16.

Rated first-quarter issuance was nearly evenly split between financial and nonfinancial issuers, with strong financial issuance during the quarter. Rated nonfinancial issuance was led by healthcare ($36 billion), telecom ($32 billion), utilities ($19 billion), high tech ($17 billion), and retail/restaurants ($16 billion).

Chart 7

The largest U.S. corporate issuers in the first quarter were dominated by financials, but the top issuer was Magallanes Inc., which will become a wholly owned subsidiary of Warner Bros. Discovery Inc. after it is spun out of AT&T. Magallanes issued an 11-part senior unsecured note offering on March 9 that was rated 'BBB-', with proceeds used to fund a special cash payment to AT&T. This offering accounted for nearly all of first-quarter corporate bond issuance in the telecom sector.

Table 3

U.S. leveraged loan issuance started strong but faded fast during the first quarter.

The U.S. leveraged loan primary market started the new year hot, with $72.7 billion of institutional supply in the first month alone--the second-busiest January on record, according to S&P Global Market Intelligence's Leveraged Commentary & Data (LCD) offering. But Russia's invasion of Ukraine at the end of February cast uncertainty over financial markets, resulting in a secondary loan market selloff and halting new issuance.

January's volume made up 64% of the first quarter's total institutional volume of $1.135 trillion, as fervent demand from investors led to deal oversubscriptions and prices that were generally close to or higher than expected levels during this period.

CLO issuance was choppy, at $29.8 billion in the first quarter, 48% of which came in February. This leaves quarterly volume well off the $39.8 billion in first-quarter 2021 that kicked off a record-setting year. But the still-strong start to 2022 was buoyed by soaring retail cash inflows to loan funds and exchange-traded funds (ETFs). Retail fund flows in most of first-quarter 2022 grew by historic proportions (a $2.29 billion weekly inflow in February was the largest ever) as investors flocked to floating-rate issuances due to inflation concerns and in anticipation of rising rates.

Chart 8

Uncertainty over the war in Ukraine and rippling economic effects rattled investors, and the weekly measure of retail fund flows turned negative in mid-March, according to Lipper, just as the Fed hiked rates by 25 bps. This was the first time since early December that loan mutual funds and ETFs registered an outflow. Still, loan fund inflows in the first quarter totaled $21.8 billion (including monthly reporters), the most since third-quarter 2013 (see chart 9).

Chart 9

Institutional loan issuance in the first quarter was driven heavily by M&A ($76.2 billion). While that's a four-quarter low by dollar amount, it represents 67% of total volume during the quarter, the highest share since third-quarter 2018. Private equity-backed transactions were the primary driver, with $40.7 billion of leveraged buyout (LBO) volume accounting for more than half of that total acquisition-related supply (53%), anchored by such benchmark deals as athenahealth ($6.9 billion) and McAfee ($5.16 billion). Loan issuance to support new LBOs also compared favorably to the prior quarter's $20.4 billion and exceeded first-quarter 2021's $36.9 billion (see chart 10).

Chart 10

As the war in Ukraine unfolded and volatility erupted, primary issuance dried up and pricing widened. Some deals already in the market were forced to the sidelines, and those that were completed featured significant price concessions. The ratio of downward to upward flexes fell to 1.1x in February, from 10.5x in January. In March, there were 17 upward flexes, with three deals flexing tighter (see chart 11).

Chart 11

With that, pricing widened, on average. The new-issue spread for institutional loans ballooned to 453 bps in March, the highest it has been since December 2018 and up from 405 bps in February and 374 bps in January, which was an 11-month low. The average yield to maturity of 5.79% in March was 136 bps higher than in January, marking its highest level since June 2020 (see chart 12).

Chart 12

On the subject of pricing, this was the first quarter following the transition to the secured overnight financing rate (SOFR) from LIBOR for new issues. The massive supply flow in January showed that the loan market was able to make the adjustment without disruption. While there were some LIBOR-based deals issued during the quarter, which were tied to add-ons and/or with financing underwritten in 2021, the vast majority of new deals were based off SOFR (98% of the busy January market), with some variations relating to credit spread adjustments.

U.S. public finance issuance fell 16% in the first quarter

As with several other sectors, U.S. municipal issuance fell in the first quarter on heightened market volatility and quickly rising rates. U.S. municipal bond issuance in first-quarter 2022 was $94.6 billion, down from $119 billion in the fourth quarter and $113 billion in first-quarter 2021. This is the lowest quarterly total since $94 billion was issued in second-quarter 2019. Issuance did increase as the quarter progressed, with $25 billion, $29.9 billion, and $39.4 billion, respectively, from January to March. (see chart 13).

Chart 13

By component, new money issuance has risen to 77% of all municipal issuance through the end of the first quarter, compared to 74% for all of last year. Refunding has fallen to 14% from 21% last year, while mixed used issuance was 8%, up slightly from 5% last year (see chart 14).

Chart 14

Seven of the 10 largest single issues from first-quarter 2022 were issued in March. The three largest were the NYS Dormitory Authority ($3 billion), California ($2.2 billion), and Regents of the University of Michigan ($2 billion).

Table 4

By state, California has issued the most debt so far this year at $12 billion, down 19% compared to this time last year. New York is second with $11.8 billion, down 46% compared to last year (see table 5).

Table 5

U.S. structured finance issuance nearly reached $182 billion in first-quarter 2022

Despite structured finance issuance increasing 36% year-over-year in the first quarter, rising interest rates and broader market volatility caused the appetite for riskier debt to wane in the latter part of the quarter (see chart 15). As interest rates rise, the cost of debt for issuers increases, and investors tend to move toward more liquid markets. Still, interest rates remain well below historical norms, and demand still exists for spread. The higher risk-adjusted yield offered by many structured finance sectors may remain attractive to some investors, especially with their largely stable performance, even during the pandemic year of 2020.

Chart 15

In the first few weeks of March, we saw more than a dozen deals stall across U.S. structured finance sectors as issuers took a "wait and see" approach to general market volatility and the conflict in Ukraine before stepping back into the market. The slowdown of the pipeline was more pronounced in sectors like ABS and CLOs than in RMBS and CMBS, and the pipeline has begun moving again, albeit more slowly than we saw at the beginning of the year. While we anticipate a slight slowdown could continue into the later spring months, it's not a matter of if the deals will close, but when. We provide a sector-by-sector breakdown below.

ABS issuance was up 3% through the first quarter and will likely remain mixed across subsectors. Auto loan and lease ABS are poised to be the most affected by the Russia-Ukraine conflict given the region has important raw materials for auto production. In addition, S&P Global Mobility reduced its light vehicle production forecasts for 2022 and 2023 by 2.6 million units each. Decreased auto production will contract sales and therefore loan originations for auto ABS products. While sales expectations have decreased, used-vehicle prices remain near last year's historic highs, which could otherwise support the sector. Credit card ABS exhibited the largest year-over-year increase through the first quarter, which we attribute to the all-in cost of funds advantage coupled with strong rating performance. Esoteric ABS has also been supportive of overall ABS issuance, with collateral such as corporate securitizations, stranded asset, container lease, and railcar issues contributing to the overall increase.

U.S. RMBS issuance was up 106% through the first quarter. Strong housing fundamentals such as record home price appreciation, strong housing demand, and mortgage rates still well below their historical average will remain supportive of further RMBS originations, specifically in the nonqualified and prime jumbo mortgage sectors.

CMBS issuance hit a post-great financial crisis record in 2021 and led the four major sectors through first-quarter 2022, up 127% year-over-year. Issuance has been driven by the single-borrower and conduit/fusion segments. While some sectors are still shaking off COVID-19-induced impacts (office, retail), other property types such as lodging and industrial properties have since returned to pre-pandemic issuance levels. The rapid increase in interest rates and broader uncertainty from the Russia-Ukraine conflict are headwinds to issuance.

Structured credit origination volume was down 29% through the first quarter, following a record $187 billion for full-year 2021. A relatively slower start to the year for CLOs was largely expected, due to some price discovery around SOFR-indexed CLO tranches and the underlying leveraged loans. The leveraged loan market has also struggled to maintain last year's pace, setting the stage for further declines in structured credit issuance in 2022. However, some of the deals in March showed managers' willingness to price shorter-dated deals and accept wider spreads to attract investors. After smashing its annual issuance record last year, predictably, the refinancings and resets market has all but dried up, with just two pricings in March. As interest rates continue to rise and spreads widen, it becomes less and less advantageous for issuers to refinance pre-existing deals at better rates.

European Financing Conditions Are Hurt By The Russia-Ukraine Conflict

The impact of the Russia-Ukraine conflict on European financial markets was more acute than in other regions, leaving financing conditions mixed during the first quarter (see table 6). Speculative-grade spreads widened as much as 163 bps from the start of the year, and there were just two issues rated 'B+' or lower in the primary market from mid-February through the end of the quarter. The ECB bank lending survey indicated tighter lending standards on business loans during the first quarter. Following the announcement that Ukraine would not be joining NATO in mid-March, financial conditions have eased somewhat, and the European speculative-grade spread has tightened back to more neutral levels.

As central banks began to adjust monetary policy amid multi-decade-high inflation, European market benchmark rates sharply rose in the first quarter, with the yield on the 10-year German Bund rising roughly 100 bps and easily moving into positive territory after years of negative yield. S&P Global economists currently expect the ECB to raise its policy rate 25 bps each quarter beginning in December, until it reaches 1.5% in mid-2024, and for the Bank of England (BOE) to hike its policy rate by an additional 25 bps in May to 1% and then pause until after 2023. The ECB is expected to conclude net asset purchases in the third quarter, while the BOE is no longer reinvesting maturities in its asset purchase facility, and bonds began to roll off in March. At current levels, market benchmark rates remain accommodative or border on neutral.

Though many measures of financing conditions remain favorable, primary markets (particularly for speculative-grade corporate debt) have been much quieter than usual. Total speculative-grade issuance, combining speculative-grade bonds and leveraged loans, totaled only €41 billion in the first quarter, with €25 billion of that coming in January.

Table 6

European bond issuance finishes the quarter with positive momentum

Rated European corporate bond issuance slowed considerably following the invasion of Ukraine but picked back up in mid-March and finished strong for the quarter. The 'AAA', 'BBB', and 'B' rating categories each saw strong issuance for the quarter. Most 'B' category issuance came in January, with only two issues totaling just €137 million printing after mid-February. Meanwhile, the 'BBB' category represented about two-fifths of issuance for the quarter.

There was strong financial issuance during the quarter, accounting for nearly three-quarters of rated first-quarter issuance. Rated nonfinancial issuance in the quarter was led by utilities (€13 billion); high tech (€12 billion); homebuilders/real estate (€8 billion); chemicals, packaging, and environmental services (€7 billion); and consumer products (€7 billion).

Chart 16

The largest European corporate issuers in the first quarter were dominated by financials. The top issuer was BNP Paribas S.A. with 11 note offerings during the quarter.

Table 7

European leveraged loan volume was hit hard by the Russia-Ukraine conflict

In Europe, the Russia-Ukraine war provided a more dramatic shock to the leveraged loan market, resulting in widely syndicated loan issuance halting from the end of February and throughout March, only picking up again as the second quarter began (see chart 17).

Chart 17

This left the volume tally for total European leveraged loans in the first quarter at just €18.8 billion, way behind the €41.2 billion recorded for the same period in 2021 and the slowest opening quarter of the year since 2016 (see chart 18). "The shock from Russia's invasion of Ukraine and instability across markets made it impossible to price anything," said one banker.

Chart 18

The effects were clearly seen in the secondary market, with the average bid in the S&P European Leveraged Loan Index (ELLI) falling from the yearly high of 99.02 on Jan. 18 to a 12-month low of 96.12 by the close on March 15. This is the lowest level since late 2020, when the market was still recovering from its COVID-19-induced falls (see chart 19). Indeed, before the pandemic hit, the market had not seen these types of sub-97 quotes in the ELLI since July 2016.

Chart 19

Returns in the index also turned negative in February, with the ELLI recording the largest monthly decline since the COVID-19 crash in March 2020, at negative 1.11% (excluding currency). A negative return of this level had not been seen since February 2016. For March, returns bounced back to positive territory at 0.23% (excluding currency) but remained in the red for the year to date, at -0.53% by the end of the quarter (see chart 20).

Chart 20

But rather than heading toward the exit, many investment managers have focused on portfolio analysis by looking for specific Russian or Ukrainian risk, before considering the second-round effects of the ongoing conflict. As a primarily western European-oriented market, actual Russian exposure in the leveraged space is generally limited, beyond a few names. These include Swedish bedmaker Hilding Anders (which also controls Russia's largest bedmaker), German pharma group Stada (which said Russia accounted for roughly 14% of its sales in 2021), and British vitamin and health food retailer Holland & Barrett (which is backed by a Russian-linked sponsor).

However, exposure to second-round effects from higher energy prices or other raw-material shortages is considerably greater, and covers names as varied as Flora/Upfield, a spreads group exposed to rising agriculture prices; Klöckner Pentaplast, a plastic films group; Tarkett, a flooring group; and Keter, a maker of resin-based garden furniture. All these names have come under pressure in the secondary market in March, to varying degrees. "I think most managers are in the same position and have now completed their initial analysis, but there is still considerable attention on the portfolio and questions from management and investors," said one source.

There was also cash to put to work in the market, as CLOs continued to print deals (see chart 21). At €9.78 billion across 23 deals, European CLO volume in the first quarter eclipsed the €7.81 billion of new issuance across 20 deals during the same period in 2021, to rank as the highest first-quarter by volume and third-highest quarterly volume overall in the CLO 2.0 era, according to data from S&P Global Market Intelligence's LCD offering. Although at least two European new issue CLOs were postponed in the first quarter amid challenging pricing conditions, considering wider volatility and mounting headwinds from all directions, the European CLO market more generally has been swift to find paths to print deals. Activity in March was characterized by higher liability costs, shorter structures, and the return of market innovations that emerged last year--particularly at the 'AAA' level.

Chart 21

Against this backdrop, on March 10, IVC Evidensia allocated a €480 million incremental term loan B6 due February 2026 to prepay revolver drawings to a small group of relationship lenders. This demonstrated that the market was open--albeit on a private, limited basis, with a wider syndication then predicated on the backdrop's continued stability. This paved the way for Infinitas and Barentz to place respective fungible add-ons of €110 million and €100 million, and Cognita and AutoScout24 also wrapped up transactions.

European structured finance volume rises on strong covered bond issuance

Within European structured finance, covered bond issuance is up an astonishing 91% year-over-year through the first quarter, with the main contributors being The Netherlands, Germany, Austria, and France, all of whom have year-over-year growth rates above 100% in the sector (see chart 22). The main driver for this is ECB monetary policy allowing for comparatively inexpensive funding for banks to issue these debt securities. In addition, TLTRO III is supposed to phase out in June, which could support the increased use of covered bonds. The ECB has yet to be as aggressive in tackling inflation as the U.S., however, our economists expect that to change once the ECB completes its quantitative easing measures. This will likely lead to a reduction in covered bond issuance as its monetary policy begins to tighten.

With regard to structured credit, primary issuance of leveraged loans in Europe saw a fairly substantial decline in the first quarter, compared to a record first-quarter 20201 and elevated fourth-quarter. While dampened originations in the latter part of the quarter consequently affected the packaging of European CLOs, issuance was still up 31% through March 2022. We expect leveraged loan originations to continue to slow as interest rates rise, inflation remains high, and the Russia-Ukraine conflict continues to unfold. The European CLO market has also shifted to shorter-duration structures, allowing CLO managers to continue to price deals despite higher liability costs and giving them the option to price sooner, which could support some issuance.

Eurozone RMBS and ABS issuance also supported year-over-year structured finance growth in the region. Similarly, strong housing fundamentals and consumer spending continue to support issuance in each of the sectors.

While the U.K.'s structured finance market has historically been driven by RMBS, covered bonds, remained the bright spot in the region, up 254% year-over-year through the first quarter. The BOE increased its lending rate by 25 bps in mid-March, as it tried to confront heightened inflation, which is nearing 8% as of this writing. This, along with other rate increases, will certainly temper covered bond issuance through the remainder of the year as tighter monetary policy makes this type of debt less attractive. RMBS issuance in the U.K. also had a strong showing through the first quarter, up 15% year-over-year, backed by a strong housing market.

Chart 22

The Russia-Ukraine Conflict Jolts Emerging Markets

During the first quarter, the emerging markets spread widened as much as 113 bps from the start of the year, but sharply recovered in the second half of March. Volatility in emerging markets was most notable in the Europe, Middle East, and Africa (EMEA) region, given its proximity to the conflict, with the EMEA spread widening as much as 308 bps from the start of the year and ending the quarter 263 bps tighter than its peak. Emerging market spreads finished the quarter wider, except for Latin America, where spreads were essentially flat (see chart 23).

Chart 23

Record first-quarter issuance was bolstered by Asia-Pacific

Emerging and frontier markets' corporate bond issuance (including unrated bonds) reached a new record for first quarter issuance, led by China and Asia-Pacific (ex-China). Most corporate bond issuance in emerging and frontier markets is unrated, and in the first quarter over 90% of issuance was unrated by S&P Global Ratings, with more than four-fifths of first-quarter issuance unrated debt from China. Also driving the overall increase was financial services, which increased over 26% relative to the same period in 2021, finishing at $461 billion. Meanwhile, nonfinancial corporates were down 5% to $236 billion.

Emerging and frontier market U.S. dollar-denominated bond issuance for the first quarter slowed but remained strong with $59 billion, led by strong issuance in Asia-Pacific (ex-China) with $25 billion and China with $15 billion.

Rated emerging and frontier market bond issuance for the first quarter also slowed. The decline was led by the speculative-grade rating categories, with strong issuance in the 'AA' and 'BBB' rating categories. Asia Pacific (ex-China) was the only region with strong rated bond issuance in the first quarter ($17 billion).

Chart 24

Chart 25

The largest issuer of rated bonds from emerging and frontier markets in the first quarter was Airport Authority Hong Kong, which issued a four-part U.S. dollar-denominated senior unsecured note offering rated 'AA+' on Jan. 5 that included a green note tranche. Proceeds were used to fund capital expenditures and for general corporate purposes, with green note proceeds used for select green projects.

Table 8

The largest emerging and frontier markets issuers tend to be dominated by state-owned Chinese issuers. The largest issuer in the first quarter was China Development Bank, with nine note offerings during the quarter.

Table 9

China dominates international public finance issuance and is the only country to see an increase

Despite increased global market volatility in the first quarter, international public finance issuance increased a heady 31% over the same period last year. That said, the only country to see an increase was China, which made up roughly 80% of the first-quarter total. China's markets are largely limited to domestic investors, so it is not totally surprising that increased rates elsewhere were not such a limiting factor there.

Outside of China, issuance was down 42% in the first quarter, with every country showing sizable drops relative to last year, or not issuing at all. Canada, Germany, and Japan accounted for about 75% of non-China total issuance.

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 averaged extremely high issuance of over $630 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 grows outside the U.S. and Europe

After a strong start to the year, we expect issuance outside the U.S. and Europe to post a modest gain year-over-year in 2022. So far, issuance in the rest of the world has been largely driven by covered bonds, but also includes robust offerings in Australia and China RMBS, Latin America repackaged securities, and Canadian ABS.

On the other hand, China structured finance issuance volume could decline in 2022, due in large part to lockdown measures to combat the ongoing health and safety concerns surrounding high case volumes of COVID-19. Already, housing prices have fallen alongside lockdowns, which could continue, and the spillover effects from the Russia-Ukraine conflict could add to this.

Meanwhile, Australia seems to be far removed from the rest of the region in terms of the impact of the Russia-Ukraine conflict, particularly as it pertains to structured finance issuance. Australia's issuance through the first quarter was dominated by RMBS, as it has been in the past. The booming property market has continued into 2022, underpinning strong investor demand for housing credit. Meanwhile, the ABS sector in Australia continues to grow.

Related Research

• Economic Outlook U.S. Q2 2022: Spring Chills, March 29, 2022
• Economic Outlook Emerging Markets Q2 2022: Growth Slows Amid Higher Commodity Price Inflation, March 28, 2022
• Economic Outlook Eurozone Q2 2022: Healthy But Facing Another Adverse Shock, March 28, 2022
• Economic Outlook U.K. Q2 2022: A Painful Surge In Inflation, March 28, 2022
• Asia-Pacific Economic Risks, Thy Name Is Inflation, March 27, 2022