Key Questions: Can We Expect New Corporate Bond Issuance to Slow Down?
Even after years of record-setting new bond issuance, the environment remains attractive for companies wanting to issue new debt.
New corporate bond issuance is a company’s primary way of refinancing current debt and building cash levels. Refinancing debt enables a company to reduce its borrowing cost by taking advantage of lower rates than existing debt while building robust cash balances that can be used for large, important transactions, including mergers and acquisitions (M&A) and stock repurchases.
In the current environment of low bond yields and tight credit spreads, the backdrop has been attractive for companies seeking to issue new bonds. Historically, new debt issues could be made more appealing than secondary-market corporate bonds through a price reduction, making them cheaper than secondary paper. However, in this world of low interest rates, demand has been so great that issuers of new debt have had little need to make significant price concessions.
Refinancing is the most common use for new debt issues. One example is the Bank of America new bond issue on July 15, a $7.75 billion, three-tranche deal with the primary goal of refinancing debt.
An example of a new issue used for an acquisition is NVIDIA, which announced in September 2020 that it intended to acquire Arm Limited for $34 billion in a deal to be financed primarily by cash and stock. While the transaction has yet to close, in mid-June 2021, NVIDIA issued $5 billion in new debt in the form of two-, three-, seven-, and ten-year bonds. The proceeds of this four-tranche bond deal will likely go in part to finance this acquisition.
Apple serves as an example of a new issue to fund a share buyback. On July 29, Apple issued $6.5 billion in new debt in a four-tranche deal. Along with using the cash for general corporate purposes, repurchasing common stock was a significant driver behind the deal.
To get an idea of how large the new bond market is, the gross supply of corporate debt issuance as of the week of July 26, 2019, was $671.2 billion. However, at the same point in the year, in 2020, corporate debt issuance was almost double that at $1.2 trillion. This year, as of July 26, the supply is at $856.4 billion.
The dramatic increase in 2020 from 2019 levels can largely be attributed to COVID-19. The Federal Reserve (Fed) cut interest rates to extremely low levels, allowing companies to refinance at low interest rates. For this reason, comparing 2021 with 2019 would likely create a more useful perspective regarding the trend in new issuance.
Some developments indicate a future slowdown in new issuance. For the past three weeks, less new debt has come to market relative to the same period in 2019. For the past three weeks, debt issuance has grown 1.97% per week on average. For the same period in 2019, the market experienced an average growth in debt of 4.11%. While this data is not determinative, it provides insight into where new issues may look to trend for the remainder of the year.
There is a clear relationship between new issues and M&A: Many companies issue new debt between the announcement date of a merger or acquisition and the closing date of that deal, as was the situation with NVIDIA. If there is a curtailment of M&A activity, we could witness a slowdown in new corporate bond issuance. However, given current market conditions with yields at low levels and credit spreads tighter than they have ever been, it is likely that corporate issuers continue to gather excess amounts of cash through the new issuance of debt.
For more information, please contact your Key Private Bank Advisor.