HOW WILL 2021 COMPARE TO LAST YEAR’S RED HOT CORPORATE BOND ISSUANCE?
A Q&A with Richard Wolff - Richard Wolff has overseen the successful growth of Societe Generale America’s U.S. dollar high grade corporate bond syndicate for over ten years. We asked him to give us his thoughts for this year following last year’s boom in issuance.
Following a record year for investment grade issuance in the US in 2020, how do you see 2021 shaping up in comparison?
2020 was a record setting year from an Investment Grade issuance perspective. The $1.8 trillion in supply was readily absorbed by investors, who viewed US credit product as a bit of a safe haven. We expect a similar supply/demand imbalance in 2021. Investment Grade supply estimates are down 30-35% for this year, so with a severe drop off in issuance, the continued cash inflows and subsequent strong demand should all bode well for credit.
Is there one noticeable factor driving the market this year? M&A, or the forecasted normalization of growth and profits, say?
As always, there are a number of factors driving issuance. Interest rates seem to be a big driver, as expectations of a rising rate environment throughout the year may cause issuers to accelerate some of their funding, which could push up H1 supply. Also, interest rate expense management is another driver, and we are seeing issuers be more proactive around Liability Management, where they take out their higher coupon debt and replace it by issuing new debt at lower yields.
Are there situations where companies are coming to the investment grade bond market this year to repair balance sheets that may have been damaged during the 2020 pandemic year?
The companies that opted to fund at the height of the Covid crisis back in March at very wide all in yields have already proven their resilience by accessing the markets at tighter levels later in 2020 and early 2021. To me, these funding exercises don’t seem to be about balance sheet repair, but more so about demonstrating access in both challenging times as well as more normal periods in the market.
Any surprises in this market so far this year?
Not sure I would call it surprising, but perhaps a bit “interesting”. We are witnessing new highs in the equity markets, and despite this move higher in stocks we continue to see enormous and incessant demand for credit product, and we are not seeing investors reallocate their funds from debt into equity product. Despite the low yields and tight spreads associated with many of today’s new issue transactions, investors continue to gravitate towards credit as it offers a stable return, and relative to the yields offered globally, USD credit product still is attractive.
There is growing pressure on companies to help alleviate environmental and social problems. Is this impacting the issuance market?
ESG is becoming much more prevalent in our daily discussions, and we are seeing it become a focal point for both issuers as well as investors. The demand for ESG product continues to grow, to the point where issuers can achieve tighter pricing on smaller ESG focused transactions than they can on larger non-ESG trades. Some of this arbitrage is due to the difference in the sizes of the trades, but a portion is definitely due to the increase in focus on ESG related securities. I would expect ESG issuance to continue to grow, and I expect Karl Petterson, the head of our team of ESG specialists to be very busy with our clients.