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Capital Markets

Corporate Debt Issuance to Remain Robust

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June 22, 2018

S&P reports “State of Play” in US and European debt markets; eyes on trade, USD

financial system softwareUS economic expansion has supported corporate growth and profitability in recent years, and the 2.9% increase in GDP that Standard & Poor’s forecasts for 2018 suggests corporate debt issuance will continue at strong levels. The trend is similar in Europe, where the European Central Bank (ECB) isn’t expected to hike rates before late 2019.

In its recently published “US Corporate Debt Market: The State Of Play in the First Half of 2018, the S&P noted that the amount of US corporate debt it rates, including bonds, notes, and term and revolving loans, increased by 8% in 2017 over the previous year, to $9 trillion. Much of that credit growth came from investment-grade debt, which has increased at a 7.7% compound rate since 2013 and jumped almost 8% in 2017, to $6.48 trillion. Speculative grade debt increased by 9% to $2.5 trillion, its first year over year increase since 2012.

Investment-grade bond issuance increased by 10% in 2017, or close to $1.1 trillion, some of which was used to refinance existing debt at still low rates, while a substantial share was used to fund M&A, share buybacks and other investor-friendly actions, according to S&P. Speculative-grade corporate bond issuance increased by a significant 26% in 2017, to $237 billion. Amidst rising rates, investor demand for floating-rated debt surged, and issuance of leveraged loans leaped by 50% in 2017, to a new high of $503 billion for institutional leveraged loan issuance.

The rating agency notes that while its economists’ forecast of 2.9% GDP growth in 2018 supports growing corporate debt, trade tensions and the strengthening dollar could negatively impact corporate growth, curtailing the need for debt.

As of mid-year, about 72% of US corporate debt was rated investment grade by S&P. By far, BBB-rated debt made up the largest share—39% of total corporate debt, or $3.5 trillion. The next largest category was single-A, with $2.3 trillion, or 25.4%.

The investment-grade companies tended to take on larger loans. The opposite is true for speculative-grade borrowers, which take on smaller loans; S&P notes that 56% of rated US corporate borrowers are speculative grade, while just 28% of US corporate debt fits into that category. The largest number of borrowers in any rating category were those holding single-B-rated debt—1,109 borrowers for a total of $1.09 trillion in debt. Those in the category of single-B-minus or lower held $498 billion of debt.

Among nonfinancial companies, the utility sector had the largest amount of debt, at $832 billion, with 81% of it investment grade. High tech came in second, with $813.5 billion, of which 71% was investment grade. Media and entertainment, high tech and telecommunications were the sectors with the most speculative-grade debt.

In terms of the type of debt, according to S&P, 80% of corporate debt was senior unsecured bonds, followed by senior secured bonds, revolvers and term loans. In the speculative-grade category, bank debt made up 51% while the remainder comprised bonds and notes. Term loans, including first-lien and subordinated debt, accounted for the largest share of speculative-grade debt, at 43%, or $1.08 trillion.

In a separate report covering Europe, S&P says it rated €5.8 trillion, just over half of which was held by nonfinancial corporates, and 85% of which was investment grade. Similar to the US, the single-A and BBB rating categories made up the largest portion, at €1.9 trillion. Most rated debt instruments, or €3.7 trillion, were senior unsecured bonds, followed by senior unsecured bonds, at €0.9 trillion.

Speculative-grade debt in Europe made up only 15% of rated debt, compared to 28% in the US, accounting for 40% of European issuers compared to 56% in the US.

The report says that 90% of European debt is in the form of bonds, notes, and preferred securities. Senior unsecured bonds were most prevalent, accounting for 64% of total debt and 69% of investment-grade debt. Revolvers were just 10% of total debt, but 38% of speculative-grade. The UK, France and Germany together made up more than half of total European debt.

S&P does not anticipate the ECB hiking rates before the third quarter of 2019. The rating agency notes that the ECB’s latest bank lending survey suggests that borrowing conditions for corporates continue to ease—a trend that continues in the US.

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