2020: THAT WAS THE YEAR THAT WAS – U.S. HIGH GRADE PRIMARY MARKETS
2020 will be known for the Great Debt Binge when corporate America and a host of foreign companies raised an unprecedented amount of capital via the USD public debt market amidst the worst pandemic crisis in over a century.
Monthly volume records in the US high-grade primary markets started breaking from January, as the monthly estimates we collate from the market were quickly exceeded. At $141.89bln, January 2020 was the second busiest ex-SSA issuance January on record behind only January 2017 ($174.033bln). Expectation had been for debt issuance in 2020 to be frontloaded but clearly something unusual was building.
Coming into the year, expectations for 2020 supply ($1.093trln average estimate) were similar to 2019 which had ended with nearly $1.13trln in total debt issuance. One reason for the expected decline was that companies had already leveraged up significantly and there was little capacity for adding on additional debt without the risk of being downgraded through investment grade.
These numbers were repeatedly revised upwards as the COVID-19 pandemic forced corporates to boost their liquidity buffers to survive and rating agencies became more lenient despite the increased leverage. But even the revised expectations ($1.6-1.7trln) proved to be shortsighted as – year-to-12/16/20 - $1.80trln has already printed.
Needless to say, the amount of capital raised this year was apt to set issuance records all along the way. 2020 was home to four of the top ten busiest issuance days of all time and eight of the busiest issuance weeks on record, including the two busiest – the week of March 30/$118.105bln and the week of March 23/$109.800bln. 2020 also saw five months produce enough issuance to crack the top ten all-time monthly volume list, including the top three spots – April/$297.775bln, March/$258.170bln and May/$248.590bln.
Surprisingly enough, these milestones were accomplished with only two of the all-time largest deals – Boeing/$25bln (#6) and Oracle/$20bln (#10). However, IGM did track twice as many deals (60) of $5bln or more, compared with only 30 such deals in 2019.
High-grade primary markets were resilient throughout the pandemic despite a widening of spreads (+401bp) and new issue concessions (+45.4bp) accompanied by some deal pullbacks at the height of the crisis, possibly the only blip in 2020.
Technicals still favored the primary market with the buyside loaded with cash and looking to invest in positive yielding dollar debt. Understandably, investors got more spread-sensitive at the height of the crisis, leading to those higher new issue concessions. But once the Fed announced a liquidity backstop, confidence in high-grade bonds rose fast and paper priced with little to no new issue concessions throughout the year despite the unprecedented volume.
M&A activity was expected to slow in 2020, which it did, more so after the spread of the coronavirus pandemic as companies focused on survival rather than inorganic growth. However, there were some very large acquisitions during the year led by T-Mobile which raised $19bln to fund its merger with Sprint in April. Books on that deal topped $59bln which showed the underlying strength of investor demand for high-grade paper. High-grade M&A volume totaled just $116.769bln in 2020, compared to $184.33bln in 2019 and $260.89bln in 2018.
Early in the year, Morgan Stanley priced the largest single SOFR-linked tranche at $2.5bln, followed closely by Credit Suisse’ $2bln deal. The year saw $19.8bln raised through 20 SOFR-linked floaters, a 53.8% increase in the number of deals and a 123.7% increase in the amount of debt raised in 2019. as the 2021 deadline for Libor discontinuation draws near. It should not have come as a big surprise since, for a good transition, it is important to have benchmark-sized paper referenced to SOFR.
We also saw an increase in the number of fixed-to-floating rate issuance with the floating portion referencing SOFR. This phenomenon is expected to accelerate as we get closer to December 31 2021 which is when the market expects that LIBOR will either all but cease to be a representative rate. Speaking of fixed-to-floating rate issuance of any type, in 2019, there were 61 f-t-f offerings totaling $100.82bln, while this year, 84 f-t-fs were priced raising $182.05bln.
2020 will also be known for the increased involvement of diversity firms in US high-grade primary bonds. In the past, diversity firms were relegated to token co-manager or passive bookrunner roles only after some handholding by the bulge-bracket banks.
All that changed with Allstate's $1.2bln 2-pt offering in mid-November which was led by a handful of diversity firms - Loop Capital, Academy Securities, Samuel A Ramirez and Siebert Williams Shank - supported by co-managers AmeriVet Securities, Cabrera Capital, CL King and Pensarra Securities, and R Seelaus. The Allstate deal gave the whole initiative a huge boost by allowing them to lead what was a critical transaction to fund its $4bln acquisition of National General Holdings.
2020 saw an explosion of ESG/SRI debt issuance. Five years ago, “green” bonds were not much more than an afterthought for most investors. Including SSA issuance, in the years from 2016 through 2018, “green” bond issuance accounted for less than 1% of all US domestic issuance.
By 2019 (49 deals totaling $35.5bln) “green” bond issuance became an integral part of the US domestic issuance scene, accounting for 3.15% of total US issuance. Even in the context of record US domestic issuance outlined above, ESG/SRI issuance, including SSA have accounted for 6.37% of total issuance with 79 deals totaling $114.73bn.
ON THE HORIZON:
Since we will likely never again see an issuance year like 2020, many strategists see 2021 volumes dropping sharply as companies seem filled to the brim with debt. M&A activity is expected to increase, and we should return to a more normal level of issuance around $1.23trln in 2021. Our discussions with the Street ranged from $1.15 - $1.30trln.
That of course assumes the pandemic impact ameliorates with the rollout of the first vaccine. In the currently expected scenario, 2021 focus will be on how companies de-leverage.
Some bankers still expect a steady flow of issuance going into next year, just not with the same sense of urgency. There are others who believe that pent up investor demand, coupled with a decline in net supply next year will carry over into 2021, especially amid rising prospects of a viable and widely available COVID-19 vaccine.
“Despite the fact that confirmed coronavirus cases continue to rise at an alarming rate, and it bound to get worse before it gets better, the promise of an impending vaccine and the prospects of Congress passing a second stimulus bill in the not too distant future, should boost not only the economy, but market confidence, as well,” said one senior banker.
He added, “Though that will probably lead to higher interest rates, in itself, it still bodes well for the bond issuance, surely not on the same scale as we saw this year, but encouraging, nevertheless. I would suspect, with the recent increase in M&A activity will replace some of the pandemic-induced issuance to where we should return to a more normal level of issuance, say $1.2trln in 2021.”