Mixed picture as US volumes wane and European volumes rebound
EUROPEAN CREDIT ISSUANCE TRENDS
Overall EUR supply jumped by a whopping 87% m-o-m in May despite ongoing volatility and challenging conditions. All asset classes witnessed an upswing in activity, notably the high-grade corporate market where supply almost quadrupled following an unusually slow April.
Corporates (ex-HY): Euro activity bounced back sharply in May as EUR33.564bn crossed the tape after an April which produced just EUR8.85bn of paper. That was spearheaded by the w/e 20-May which produced a bumper EUR14bn of single currency supply courtesy of 19 tranches, making it the third busiest week of the year for the asset class. TenneT (EUR3.85bn four-part Green) and Visa (EUR3bn three-part Vanilla) stood out, marking the first and joint second largest single currency corporate trades of 2022 respectively. Noticeable in May was that NICs remained elevated with the average 13.84bp marking the second largest of the year with only April seeing higher (13.95bp).
FIG: Non-covered FIG supply jumped in May as issuers emerged from earnings blackouts to drive the busiest month since January. The EUR26.953bn raised was made more impressive given the complete closure of the FIG market in the second week of the month as sentiment took a turn for the worse. In the latter stages of May, subordinated supply restarted as the combination of higher yields, wider spreads and improving sentiment enticed investors to lock in historically elevated returns. With rising supply came larger concessions though with the average in May marking the second highest monthly average of 2022.
SSA: The month started off very much on the back foot for SSAs and it wasn't until 10-May that we saw the first deal emerge. With that in mind the EUR47.4bn tally seems fairly respectable, even though it represents the second slowest month of the year so far. Coverage ratios remained below average at 3.44x (vs 4.11x over last 2 years) whilst average NICs were once again trending higher, landing at 5.78bp. However, that was led by elevated premiums related to issuance from CEE names including Republic of Lithuania (+30bp NIC), Republic of Poland (+20bp) and Polish development bank BGK (+55bp). Removing those from the equation NICs were more in line with the longer-term average at just above 2bp. Core sovereign activity was back on the agenda with France, Finland, Luxembourg and Austria all well received, with comfortable coverage ratios and lower NICs relative to the CEE names. EUR21.4bn of the month's volume wore an ESG label, with EUR18.4bn of those green bonds, including the aforementioned issuance from France, which was its first green inflation-linked bond.
Covered: May turned out to be another month for the record books, with the EUR22.85bn sold now the highest volume for a May on IGM records. This was achieved via 36 individual tranches, also the most lines launched in one month YTD. This activity came amid a much softer market backdrop where NICs were elevated (up 35% m-o-m) alongside slower spread compressions (down 36% m-o-m) and lower average orderbooks (also down 36% m-o-m). Austrians continued their march on the markets (eight tranches for EUR3.6bn) while we saw the year's first sale from Estonia. Ethical debt sales were up this month too, the highest monthly volume YTD. In April, ESG covered sales were EUR1.5bn (EUR500m social/EUR1bn Green). By May, that had grown to EUR4.25bn (EUR1.5bn social/EUR2.75bn Green).
HY (Corporate): High yield volumes remained subdued in May as investor worries over inflation, recession, war in Ukraine and lock downs in China continued to make for a challenging backdrop. FRN issuance was prominent (as was double B paper) as issuers did their best to mitigate investor worries but the postponement of Europcar's opportunistic SLB mirror note due to deteriorating conditions highlighted the lack of stability needed to really kick-start sub-investment issuance. Although May saw the highest monthly volume since February, EUR high yield issuance was down almost 75% on the May 2021 figure. There was, however, a glimmer of hope that the market was establishing new pricing levels at the end of the month as Volvo Cars not only generated good support in primary, but also went on to perform in secondary, something of a rarity for 2022 deals.
APAC CREDIT ISSUANCE TRENDS
May 2022 was a month of two halves in the APAC primary US$ bond market. While a combination of regional holidays and host of negative headwinds continued to weigh on activity in the first half of the month, we saw a welcome pick-up in momentum in the latter part of May. That was supported a more constructive tone in the broader cash credit market where spreads bounced back from recent wide levels, against a backdrop of global economic slowdown fears, expectations that monetary policy tightening may be less aggressive than previously anticipated, and some attractive secondary market valuations.
That provided a needed shot in the arm for a regional primary market which had often struggled to maintain fluidity for large parts of 2022, as heightened stagflation fears, potential economic fallout from China's Covid restrictions and the ongoing war in Ukraine, all served to keep broader risk market volatility elevated and bond issuers sidelined.
Total APAC USD issuance came in at USD21.812bn in May or a slightly smaller UD119.63bn when stripping out the contribution of Japanese issuers. The former marked a notable decline from the USD30.867bn which made it over the line the previous month of April 2022 and was the second lowest issuance volume month of this year so far, after the meagre USD18.79bn that priced February.
Investment grade issuance continued to dominate volume in May 2022, coming in at USD18.94bn which equates to more than 96% of the overall monthly total raised (excluding Japan), underpinned by some well-received transactions from a larger and more diverse group of regional issuers. That included a very successful USD3.25bn dual-tranche Sukuk from the Republic of Indonesia which not only boasted the sovereign's largest ever Sukuk to date, but also included the largest USD-denominated single Sustainable Sukuk outstanding from any borrower in the case of the USD1.5bn 10-year tranche.
Those investment grade issuers which accessed the APAC USD primary bond market in the second half of May 2022 were also rewarded with some more economic funding costs, as underlying government bond yields and new issue concessions both edged lower throughout the month. Having peaked at close to 3.13% on 6th May, the 10-year US Treasury yield had gradually fallen to around 2.74% by 27th May, before spiking once again to ca. 2.90% in the very final few days of another volatile month in the US government bond market.
Meanwhile, the average new issue concession paid by regional investment grade issuers declined to 7.56bp in May, down from 10.88bp in the previous month of April and an even higher 16.65bp in March 2022.
Finally, while by no means the only segment of the market which has struggled to fire on all cylinders, offshore issuance from Chinese LGFVs, which had regularly propped up overall dollar supply from the country in the prior couple of months amid the ongoing absence of Chinese property companies, dropped to USD2.2925bn in May. That was down from the USD3.392bn in April and a larger USD4.1405bn in March 2022.
US CREDIT ISSUANCE TRENDS
Investment Grade ex-SSA issuance for the month of May totaled USD86.81bn which fell short of Street estimates, which ranged from a low of USD125bn to a high of USD138bn. This tally also fell short of the decade-long average May volume of USD130.658bn and made May 2022 the second-slowest May in the last 10 years, ahead only of May 2012's USD79.782bn.
The bulk of May's volume came from the domestic FIG sector at 37%, while Yankee issuers accounted for 32% of the month's deal flow. Domestic industrial/corporate issuance fell slightly from its 23% tally in April to 22% in May, with utility companies contributing 6%.
May's volatile environment resulted in investors demanding larger concessions in exchange for taking on extended risk, with the month's average contraction from IPT/PX a modest -18.7bp vs. the year-to-date average of -20.5bp. Book coverage in May averaged 2.94x, and NICs averaged an eye-opening 11.98bp in contrast to the year-to-date averages of 2.84x, and 9.04bp respectively.
Historically, issuance has slowed in June which has consistently ranked eighth overall with an average ex-SSA volume of USD96.073bn (although June 2021 was an exception at USD116.675bn). However, market respondents have forecast a June total above USD100bn, with the average estimate at USD103.7bn, while the lowest estimate at USD87.5bn and the highest – provided by a few respondents – at USD115bn.
In the US high yield market in May, there were 4 deals priced for a total of USD3.95bn, the fewest since December 2018 when no deals priced. The average spread, as calculated in the ICE/BofA HY index, tested a new year-to-date wide of +494bp during the month and wrapped up May at +422bps, twenty-five (+ 25bps) basis points wider from the April close at +397. Issuance was muted in May due to a “risk off" mindset which also led investors to favor higher quality credits with BB and B-rated deals outperforming CCCs by 2% to 3% for the month.
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