Chart 1

Table 1

S&P Global Ratings Research expects global bond issuance to contract about 16% in 2022 (see chart 1).

Our downward revision from our prior forecast of a 5% decline reflects the deep hole of the weak year-to-date totals, which we feel will largely prevail for the remainder of the year. While there was the possibility that borrowing costs could stabilize in the near term and primary markets would resume normal activity, persistently rising inflation has prompted markets to price in more interest rate increases by most central banks. And recession odds are rising, in no small part to expectations for central banks to continue tightening--perhaps too much--while the Russia-Ukraine conflict continues with no end in sight. At this point there appears to be little to no possibility for positive surprises in the near term for the global economy or financial markets.

Most sectors also set recent or all-time high issuance levels in the prior two years while securing longer maturities and seeing lower rates than historically. Refinancing debt as well as securing funds to ride out the pandemic have left many issuers in a position to hold back this year amid volatile primary and secondary markets. In fact, despite large year-over-year declines, some sectors are returning to roughly their pre-2020 trend growth rates.

A Brutal First Half With Little Relief In Sight

The first quarter of 2022 started off with one market-moving event after another, resulting in falling asset prices and rising interest rates. At the time, there was still some optimism that the Russia-Ukraine conflict may be temporary, that inflation might start slowing, and that interest rates might stabilize, allowing primary debt markets to open up to more normal levels of activity. Since then, however, all of these stressors have gotten worse, and interest rates have continued to climb while aggregate bond issuance slowed across all asset classes, in some cases erasing first quarter gains.

From equities to debt markets to major currencies, declines have dominated most financial assets for the first half of this year, while inflation across many regions has increased (see chart 2). This widespread asset repricing has come alongside a deep fall in bond issuance.

Chart 2

During the first quarter, market reactions were largely a case of repricing assets in a new, rising rate environment. But in the second quarter, rising recession odds were added to the mix, as well as concerns over possible stagflation--a period of high inflation and lower growth. Indeed, inflation readings across regions are rising to generational highs, while one potential indicator of an upcoming recession--an inverted yield curve between 10-year government bond yields and the yield on their three-month cousins--remains in positive territory but is falling very quickly (see chart 3). In fact, in the U.S., the yield curve has fallen 171 basis points (bps) between May 6 and July 14--the fastest decline in a comparable time frame in roughly 35 years. Added to this, the Atlanta Fed's GDPNow projection has second-quarter U.S. GDP contracting 1.2%, following an actual decline of 1.6% in the first quarter. If this proves correct, we may already be in a technical recession, defined as two successive quarters of contraction.

Chart 3

Increasing borrowing costs have been the hallmark of 2022 from a credit perspective, and they have certainly cut into issuance thus far. We believe that yields will have to stabilize before markets are ready to resume more normal issuance levels. That said, some stability has surfaced lately, but not for everyone. In the U.S., Treasury yields on mid-to-longer-dated debt have started to stabilize and even pull back, but corporate yields, especially those on the lowest-rated bonds and loans, continue to rise (see chart 4). This divergence in yields could be another early indicator of a pending recession because it reflects the markets' typical "flight to safety" that often occurs, leading to quickly widening spreads.

Chart 4

So far, expectations for the federal funds rate remain around 325 bps to 350 bps by year-end despite June's punishing inflation reading. Markets may have concluded that yield stability will indeed present itself this year, only that the Fed may act more aggressively to get to a similar final level on the fed funds rate more quickly. If this proves correct, Treasury yields may have some room for further widening, but perhaps not to a drastic extent.

Outside of the U.S., central banks' challenges are arguably more complex. The ECB has just raised the deposit rate by 50 bps, higher than the anticipated 25 bps, but has also acknowledged its desire to control widening spreads on government debt between member states at the same time via the newly proposed Transmission Protection Instrument (TPI). And emerging markets are sensitive to both monetary policy changes from developed markets, generally, and are very vulnerable to global supply disruptions, which are now affecting essentials such as food and energy to the point where social instability is starting to increase in some locations.

Ultimately we feel the main driver of sentiment and bond issuance for the remainder of the year is the same as it has been in the first half: the Fed. Already markets in other regions have been reacting to Fed actions and U.S. inflation readings (i.e., that which influences future Fed actions). The Russia-Ukraine conflict will continue to weigh heavily this year, as well as any protracted slowdown in China.

Issuance Projections

We expect nonfinancial issuance to decline about 30% this year, with deeper declines possible if conditions worsen

Global nonfinancial corporate issuance remains the hardest hit sector in the first half, falling 33% relative to 2021. With inflation and interest rates still rising, it will likely be some time before primary markets resume typical issuance levels. We've lowered our base case for 2022 to reflect a 30% decline for the year. Through the first two quarters, the shortfall relative to last year has been fairly consistent quarter to quarter. For now, we expect the current pace of issuance to continue, but a further contraction if conditions worsen could widen the existing gap substantially.

Much lower first-half issuance relative to last year, high cash balances of rated issuers across all regions, low refinancing needs in the immediate term, and rising yields alongside increased odds of recession will continue to suppress debt for the remainder of the year. The global merger and acquisition (M&A) pipeline has also fallen this year from its historically high levels in 2021.

As first-half declines go, 2022 is thus far the second largest, after 2010's 42% contraction from the prior year. If the current 33% decline were to continue through year-end, this would be the largest year-over-year decline recorded. That said, it would also be something of a return to normal. From 2012-2019, global nonfinancial corporate bond issuance displayed a fairly steady compound annual growth rate (CAGR) of about 4.7%. If we were to assume that pace continued after 2019, we can see that between 2020 and 2021, there was a roughly $1.1 trillion "surplus" of issuance (see chart 5). The 33% decline thus far, if extended through year-end, would balance out much of the surplus from the past two years, perhaps indicating a more normal pace of issuance growth in the years ahead.

Chart 5

Quickly rising rates in the U.S. and Europe have combined with less of an impending need for aggregate funds among nonfinancial companies as a result of the debt totals secured in the prior two years. Meanwhile, Chinese issuance has slowed as well, with a large drop-off in two of the largest sectors: homebuilders/real estate, and high tech. Other sectors have seen increases, but the economic cost of recent lockdowns has been noticeable. Some relief on the policy front may help stem the declines in home sales, via lower required deposits, but unless there is the central bank loosens rates at the rate of prior slowdowns, softer economic activity will likely keep issuance growth much lower in 2022. Given the current headwinds in the U.S. and Europe, we feel any relative upside in issuance would come from outside those two regions in the remainder of 2022.

We expect financial issuance to contract about 10%, but with potential for more moderate declines

Bond issuance by financial services companies in the first quarter grew about 9%% relative to last year but turned to a year-to-date decline quickly in the second-quarter with a 29% year-over-year decline. Much of the relative decline between quarters was driven by large pullbacks in the U.S. and Europe. Earnings expectations for the second quarter are generally calling for declines in the U.S., which could limit any second-half growth. But even with a 10% decline, 2022 would finish well ahead of even 2020's strong total.

Unsurprisingly, and similar to nonfinancial companies, the M&A pipeline for global financial services has been falling this year as well. Rising rates may bolster net interest margins but add risks to banks' loan portfolios and the possibilities for losses down the road. These are offsetting forces in terms of balance sheet maintenance, but with risks weighted to the downside for economies, banks may hold back issuing in light of other potential challenges. In the U.S., very large reserve balances that banks hold at the Fed persist, which allow for some flexibility to issue more debt, if needed. However, they are shrinking, if slowly. Issuance should find some marginal support from slightly higher total loss-absorbing capacity requirements as of Jan. 1, 2022.

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 later this year. Issuers will more likely use covered bonds, given their typically lower yields, and this has arguably been the case in the first half. 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 $162 billion in 2021, with annual growth rates of 49%, 35%, and 19.3%, respectively. China's issuance is off to a healthy start in 2022, up 7.5% in the first half. The healthy refinancing pipeline, with over $1.5 trillion of bonds due in the second half of 2022 through 2024 (based on face value), should limit some downside from rising global market volatility or leverage clampdown efforts.

Global structured finance issuance could experience a decline of 12% by year-end 2022

Following a post-Global Financial Crisis issuance record of $1.3 trillion in 2021, global structured finance issuance lost its momentum from the first quarter, coming it at $706 billion on the year, a 20% year-over-year increase (although weaker than the 49% increase through the first quarter). While still outpacing last year, a confluence of risks, such as high inflation, tightening monetary conditions, destabilized energy prices, and continuing geopolitical tensions, continues to plague markets. This has further shifted our issuance expectation toward the downside for the sector. Further, an exceptionally active second half of 2021 will present a difficult mark to compare against.

We've lowered our structured finance issuance forecast to -12%, with a range of -17% to -7% based on these mounting concerns, with risk toward the downside. Since last quarter, our economists have lowered their GDP growth projections and increased their estimate of recession risk, which generally results in lower issuance for structured finance. However, with some support from strong first-quarter issuance, we anticipate the 2022 total may still land near 2019 levels. This downward expectation reflects mixed results, with some sectors and subsectors likely to see modest declines while others may remain flat or slightly outperform last year's volume. That said, this base case would still come in well above 2018-2020 annual totals.

While the U.S. represented nearly two-thirds (61%) of the global structured finance market in 2021, the covered bonds sector (which is nonexistent in the U.S.) continues to drive the increase in issuance in Europe and the rest of the world. However, the catalyst of accommodative monetary policy that allowed for relatively cheap funding for lenders to issue these debt securities is diminishing, as central banks take a more aggressive approach to tackling inflation. As such, we expect the pace of covered bond issuance to continue to cool as the year progresses.

With the U.S. representing such a significant portion of the global structured finance market, we expect this region to be the main driver of the year's decline. While some sectors, such as residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), have thus far been more resilient to the market and economic pressure on overall issuance through the first two quarters, we expect a more lackluster second half. We anticipate U.S. asset-backed securities (ABS) will erase the slight gain made through June and collateralized loan obligations (CLOs) to trail last year's pace through the remainder of the year. Even so, these comparisons are against a post-Global Financial Crisis record in 2021, and 2022 could still end above 2019 levels.

Given the growth in the first half, we could see modest improvement in new issuance outside the U.S. and Europe by year-end relative to last year. While covered bond issuance will likely trail off, RMBS issuance in Australia and Japan may continue to grow.

U.S. public finance issuance could decline about 14% this year

Heightened market volatility and rising interest rates have led to a fairly consistent decline in issuance volumes over the past two quarters, which fell 16% relative to first-quarter 2021. This remains the second-largest decline by asset class this year after, nonfinancial companies.

This steady decline will likely persist, keeping the 2022 total roughly 14% lower than 2021. We believe states and municipalities can ride out rate volatility on the surplus from federal pandemic assistance for at least the remainder of the year to the same extent they have in the first half. Variables were are watching include the effect of Fed policy on economic growth. A sudden downturn could increase the need for state and local services. Political gridlock all but ensures the absence of additional federal stimulus. Because of lingering uncertainties, our forecast range for issuance growth this year is -20% through -7%. That said, our base case would bring 2022's total roughly in line with 2019.

International public finance issuance could end the year flat

Of all asset classes, the least likely to feel the impact of higher policy rates from geopolitical stress is international public finance. But that is only because Chinese issuers are now accounting for even more of the total (84% in first-half 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.

Only issuance out of Norway and New Zealand saw an increase relative to the same period in 2021, while China's total is up 60% over the same period. Meanwhile, issuance from the rest of the world contracted 40% relative to first half of 2021. Ultimately, 2021's record total was supported by strong quarterly totals later in the year, which may be hard to beat. Because of the second-half comparison from 2021 as well as the slowing--but still positive--first-half pace, we feel 2022 issuance will be roughly flat compared with 2021, with some potential for a modest increase or decrease.

First-Half Summary

Global bond issuance in the first half totaled $4.2 trillion, down 10.9% from the first half of 2021. The largest declines continue among nonfinancial companies (down 33%) and U.S. public finance (down 14.5%). These were offset by gains among structured finance (up 20.4%) and international public finance (up 22%). Although up by 9% through the first quarter, global financial services is now down 10.6% through the first half. 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 Tighten Quickly

Higher rates in the second quarter contributed to rapid tightening of U.S. financial conditions. The Federal Reserve has taken aggressive policy actions to keep inflation expectations anchored near its 2% target and is on track to raise interest rates over 300 bps by year end--the fastest pace for rate increases in over 30 years. Aggressive Federal Reserve policy and supply-chain disruptions are likely to weigh on growth, and S&P Global economists now forecast 2% and 1.6% GDP growth in 2022 and 2023, respectively (down from 3.2% and 2.1%, respectively, in March, and 2.4% GDP growth in June).

In the second quarter, primary and secondary market yields quickly reached restrictive territory, and while secondary market credit spreads broadly remained neutral, the 'CCC/C' spread has widened to over 1,000 bps. The distress ratio remained relatively low at quarter-end but rose nearly 600 bps since April. We expect financial conditions to tighten further in the second half of the year, and capital market access could remain restrictive for weaker-rated issuers.

Table 2

U.S. Bond Issuance Slows Into Quarter-End

The fast-changing market environment was a headwind to issuance in the second quarter. Rated U.S. corporate bond issuance slowed, with weak second-quarter issuance across all rating categories. After issuance firmed in March, it fell sharply in April and continued to decline through June, with the weakest total for issuance during that month since 2013. Investment-grade issuance totaled $217.6 billion and speculative-grade issuance totaled just $22.8 billion, the lowest amounts for the quarter since 2013 and 2005, respectively. While there was a slight uptick in speculative-grade issuance in June, most deals priced at more restrictive levels and came ahead of the June Federal Open Market Committee (FOMC) meeting.

The slowdown in second-quarter rated issuance was led by nonfinancial companies, which tumbled to $107 billion, the lowest amount for a quarter since second-quarter 2010 at $76 billion. Rated nonfinancial issuance was led by high tech ($30.9 billion), utilities ($24.1 billion), consumer products ($9.6 billion), homebuilders/real estate ($6 billion), and chemicals, packaging, and environmental services ($5.9 billion). The pace of financial issuance has also slowed, but it remained strong for the quarter with $133.4 billion.

Chart 6

The largest U.S. corporate issuers were dominated by financials in the second quarter. Bank of America Corp. tops the list with two three-part senior unsecured note offerings in April that totaled $13.3 billion.

Table 3

U.S. public finance issuance remains lower through the second quarter. U.S. municipal bond issuance in the second quarter of 2022 was $100 billion, down from $101.6 billion in the first quarter and $122.8 billion in the second quarter of 2021. This is the lowest quarterly total since $94 billion in the second quarter of 2019. Issuance fell month over month, from, to $34.7 billion in May and $27 billion in June from $38.3 billion in April (see chart 7).

Chart 7

Breaking out issuance into components, new money issuance has risen to 80% of all issuance through the second quarter, compared with 67% for all of last year. Refunding has fallen in terms of percentages, down to 13% from 23% last year, while mixed used issuance was 8%, down slightly from 10% last year (see chart 8).

Chart 8

The largest single issues from the second quarter of 2022 were from April and May, with only two from June. The three largest were the Louisiana Local Government Environmental Facilities Community Development Authority, with $3.2 billion, followed by the University of California, with $3 billion, and Illinois, with $1.6 billion.

Table 4

For the year to date, California has issued the most debt, with $25.7 billion, down 32% compared with this time last year. New York is second, with $23.97 billion, down 1.8% compared with last year (see table 5).

Table 5

U.S. structured finance issuance nearly reached $374 billion in first-half of 2022. Structured finance issuance was still in the black, with a 7% year-over-year increase in the first half. But rising interest rates, amid much higher market volatility, caused the appetite for riskier debt to slump in the second quarter, erasing a majority of the 36% gain through the first quarter (see chart 9). As interest rates rise, the cost of debt for issuers increases, and investors tend to move toward more liquid markets. Even so, interest rates remain well below historical norms, and demand still exists for spread products. The higher risk-adjusted yield offered by many structured finance sectors could remain attractive to some investors, especially with their largely stable performance, even throughout the pandemic year of 2020 (see chart 9).

Chart 9

U.S. ABS issuance was up just 2% through the first half of the year and will likely strike its slight gain in the coming months but remain mixed across subsectors. Credit card ABS exhibited the largest year-over-year increase through the first two quarters, which we attribute to the all-in cost-of-funds advantage coupled with strong rating performance. Commercial ABS (equipment, fleet lease) and personal/consumer loan ABS were also above their respective year-to-date totals last year.

Meanwhile, all other subsectors have since fallen below last year's pace. Auto loan and lease ABS, which generally lead U.S. ABS issuance, were 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 has contracted 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. While struggling behind last year's clip, esoteric ABS has also supported overall ABS issuance, with collateral such as recovery bonds, recurring revenue, solar, timeshare, and insurance premium posting year-over-year increases through June (see "U.S. Structured Finance Snapshot: The Health Of U.S. Consumers," July 15, 2022).

U.S. RMBS issuance was up 17% through the first half of 2022. Economic fundamentals such as strong housing demand and supply shortages boosted strong home price growth. While this eroded affordability, record low mortgage rates supported RMBS originations through the first quarter. However, housing demand has since begun to contract as interest rates have increased and the prospect of a recession looms. As such, we expect loan origination to cool, and, in turn, the issuance of U.S. RMBS deals should subside.

U.S. CMBS issuance hit a post-Global Financial Crisis record in 2021 and led the four major sectors through the first half of 2022, also up 17% year-over-year (a tick above U.S. RMBS). Issuance has been driven by both the single-borrower and conduit/fusion segments. While some sectors are still shaking off the impact of the COVID-19 pandemic (e.g., office and retail), other property types such as lodging and industrial properties have since returned to pre-pandemic issuance levels. The rapid increase in interest rates combined with wider spreads and broader uncertainty will likely challenge second-half issuance.

Structured credit new issuance volume was down 20% through the first half, 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 fallen behind last year's pace by roughly 50%, setting the stage for further declines in structured credit issuance in 2022. However, spreads remain considerably wider compared with a year ago, which has underpinned relatively consistent issuance month to month. We've begun to see a wave in "print and sprint" issues, those in which managers acquire targeted assets after the settlement of the transaction to take advantage of discounted loans. Moreover, many managers have otherwise become increasingly creative in the packaging of these securities, even going as far as including larger percentages of corporate bonds as leveraged loan origination has fallen off. Further, we have seen some managers' willingness to price shorter-dated deals and accept wider spreads to attract investors, all of which could continue to support steady issuance.

After smashing its annual issuance record last year, the refinancings and resets market has all but dried up, with just a handful of pricings in the second quarter. As interest rates continue to rise and spreads widen, it becomes less and less advantageous for issuers to refinance preexisting deals at better rates.

European Financing Conditions Reflect Rising Risk

Financial conditions in Europe continued to tighten in the second quarter as supply disruptions from the Russia-Ukraine conflict and persistent inflation weigh on the region. Secondary market speculative-grade spreads, which began the quarter around 400 bps, sharply widened to over 600 bps, and primary markets for speculative-grade issuers became even more restrictive during the quarter.

Central banks are now tightening policy faster than previously expected to bring down very high inflation, and this will further slow growth. S&P Global economists now forecast 2.6% and 1.9% GDP growth for the eurozone in 2022 and 2023, respectively (down from 3.3% and 2.6%, respectively, in March). Higher short-term rates will contribute to further tightening in European financial conditions in the second half the year.

Table 6

Choppy European Bond Issuance In The Second Quarter

Second-quarter rated European corporate bond issuance dropped to its lowest level since 2012, with just the 'A' rating category seeing strong issuance. After the strong recovery in the second half of March, issuance plunged again in April and was choppy during the quarter. Investment-grade issuance totaled €142.3 billion and speculative-grade issuance totaled just €7.9 billion, the lowest amounts for the quarter since 2012 for each respectively. In the second half of June there was an uptick in speculative-grade issuance that coincided with the ECB's announcement of its plans to develop an antifragmentation tool and a rally in global rates that was spurred by the U.S. Federal Reserve's June policy decision.

Nonfinancial companies led the slowdown in second-quarter issuance, plummeting to €40.9 billion, the lowest amount for the quarter since 2011. Rated nonfinancial issuance was led by utilities (€12.1 billion), consumer products (€7.3 billion), health care (€4.3 billion), homebuilders/real estate (€4.2 billion), and chemicals, packaging, and environmental services (€2.5 billion). Financial issuance was also weak for the quarter, dropping to €109.3 billion.

Chart 10

The largest European corporate issuers in the second quarter were dominated by financial services. The top issuer was Landesbank Hessen Thueringen with several note offerings during the quarter totaling €8.3 billion.

Table 7

European structured finance volume rose on strong covered bond issuance, but momentum slows. Within European structured finance, covered bond issuance is up 88% year-over-year through the first half of 2022, with the main contributors being The Netherlands, Austria, France, and Germany, all of which have year-over-year growth rates near or well above triple digits in the sector (see chart 11). 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 set to start phasing out this year, which could support the increased use of covered bonds. That said, while the ECB has yet to be as aggressive in tackling inflation as the U.S., inflation hitting a record high in the eurozone in June has since changed expectations for rate hikes in July. Further, as of July 8, covered bond issuers in EU member states must issue in accordance with the EU Covered Bond Directive, with noncompliance resulting in the loss of privileged treatment the product previously enjoyed. While its estimated that 70% of countries have become fully compliant, other countries have been delayed in implementing the new laws, which could result in decreased issuance immediately following the harmonization (see "European Covered Bonds Reach Harmonization Milestone As The Journey Continues," July 12, 2022). We expect these factors, among others, to lead to a reduction in covered bond issuance through the remainder of the year.

Primary issuance of leveraged loans in Europe saw a substantial decline in the first half compared with a record first half in 2021 and elevated fourth quarter. Decreased originations in the latter part of the first quarter and through the second quarter consequently affected the packaging of European CLOs, with issuance now down 22% through June 2022. We expect leveraged loan originations to continue to decrease as interest rates rise, inflation remains high, and the Russia-Ukraine conflict continues to disrupt the European economy. 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. However, this effort does not appear to be as supportive of issuance as it has been in the U.S. Further, the euro has now dropped below par with the U.S. dollar for the first time in 20 years, which could also dampen CLO new issuance as investors may move to other markets.

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

While the U.K.'s structured finance market has historically been driven by RMBS, covered bonds, too, remained the bright spot in the region, up 155% year over year through the first two quarters. The Bank of England has increased its lending rate by 25 bps on multiple occasions this year as it attempts to confront heightened inflation, which is currently over 9%. This, along with larger anticipated 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 half, up 14% year-over-year, backed by a strong housing market.

Chart 11

Emerging Market Spreads Widen On Global Growth Concerns

The emerging markets spread widened 63 bps in the second quarter, ending June at its widest level since March. The Latin America region widened the most (147 bps) followed by Europe, the Middle East, and Africa (EMEA) (102 bps) and Asia (14 bps) (see chart 12). A slowdown in the U.S. will more directly affect Latin America, and the Russia-Ukraine conflict is weighing most on emerging Europe. However, slowing global growth, high inflation, and higher global rates are headwinds for each of these regions.

Chart 12

Weak Second-Quarter Issuance Across Emerging Markets

Emerging and frontier markets corporate bond issuance (including unrated bonds) slowed across all regions in the second quarter. Issuance was light in EMEA and Latin America but remained strong in Asia Pacific, led by strong issuance from China. Most corporate bond issuance in emerging and frontier markets is unrated. In the second quarter, over 95% of issuance was unrated by S&P Global Ratings, with 85% of issuance unrated debt from China.

Emerging and frontier market dollar-denominated bond issuance slowed to just $31 billion in the second quarter, the lowest total for the quarter since 2010. Dollar-denominated issuance was weak across all regions with Asia Pacific (excluding China) seeing the most at $16.5 billion, followed by China at $10.9 billion.

Rated emerging and frontier market bond issuance for the second quarter totaled just $12.7 billion, the lowest amount for the quarter since 2004. Rated issuance was weak across all regions and rating categories.

Chart 13

Chart 14

The largest emerging and frontier markets issuer of rated bonds in the second quarter was Tsmc Arizona Corp., a subsidiary of Taiwan Semiconductor Manufacturing Co. Ltd. It issued a four-part senior unsecured note offering totaling $3.5 billion on April 19 that it used for general corporate purposes.

Table 8

The largest emerging and frontier markets issuers tend to be dominated by state-owned Chinese issuers. That said, the largest issuer in the second-quarter was the same as in the first: Bank Of China Ltd., with three note offerings during the quarter totaling $13.7 billion.

Table 9

China Continues Its Dominance Of International Public Finance Issuance

Running contrary to most other sectors, except structured finance, international public finance issuance increased a heady 22% over the first half of the year relative to 2021. That said, this growth is nearly completely attributable to China, which made up over 80% of the 2022 total so far. 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. That said, local governments are piling on debt and will likely need to cut back or stabilize their debt loads moving forward. In fact, total second-quarter growth for IPF was down to 13% from 37% through the first-quarter.

Outside of China, issuance was down 40% in the first half, 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, and 2020 exceeded the $1 trillion mark for the first time, only to be eclipsed by 2021 at $1.2 trillion.

Structured Finance Issuance Growth Outside Of The U.S. And Europe Slips But Remains Strong

After a strong first half, issuance outside the U.S. and Europe is likely 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 it also includes robust offerings in Australian and Chinese RMBS, Latin American repackaged securities, and Canadian ABS.

On the other hand, Chinese structured finance issuance volume will almost certainly decline in 2022, due in large part to lockdown measures because of ongoing COVID-19-related health and safety concerns. Housing prices have already fallen during lockdowns (which could continue), and the spillover effects from the Russia-Ukraine conflict could exacerbate this problem.

Meanwhile, Australia seems to be far removed from the rest of the region in terms of the impact of the Russia-Ukraine conflict, particularly where structured finance issuance is concerned. Aside from covered bond issuance, Australia's issuance through the first two quarters 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 has also seen moderate growth.

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