Bond markets build immunity against Coronavirus
The new year started, and it came with the most challenging set of difficulties the world has faced in many years. COVID-19 struck first in Asia and, after a few weeks of rigorous efforts to contain the virus, it spread to the Middle East, Europe, and then to all other continents. What this means for the world, and specifically for financial markets, is difficult to predict, especially with the crisis ongoing. However, the shock administered to capital markets has been considerable. At present, volatility is the new standard, while some of the economic events unfolding have not been seen since the financial crisis of 2008.
And yet despite all the present turmoil in the market, global bond sales in the first quarter of 2020 achieved the highest volume ever recorded for this period: $2.07tr worth of bonds distributed amongst investors, a 5% increase compared to the same period in 2019. How is such a performance possible in these uncertain times? There are those that see market downturns and contractions as the best moment to seize opportunities. However, the seemingly good global volume mark belies the complexities of regional performances. Only Americas has been able to top the volume it sold the previous first quarter: $987.5bn issued in 2020 Q1, a 34% year-on-year increase. In contrast, Asia Pacific volume went down by 17% to $395.1bn, and in EMEA issuance also took a negative turn: 8% volume decline to $689.7bn. However, it is worth remarking that both North America and Latin America experienced issuance growth: 33% to $939.3bn and 46% to $45.5bn, respectively. All other sizeable regions, except for Japan (17% up to $77.0bn), suffered sharp corrections.
Further analysis reveals that not only were markets geographically skewed, but that deal size also mattered. With 4,573 deals, the first quarter of the year had the lowest pricing activity since 2009, but also the largest average deal size recorded on a first quarter at $453.2m. The quarter also saw record figures for large deals: a total of 520 bonds were priced with face values exceeding $1.0bn, totaling $1.18tr.
These record figures are highlighted by the largest deal of the year and 13th largest ever priced: Oracle came to the market on March 30th executing a $20.0bn transaction, split into 6 tranches. The US company was not the only one: Anheuser-busch InBev (€4.5bn), SYSCO ($4.0bn), TJX Companies ($4.0bn), British American Tobacco ($2.4bn) and Volkswagen (€2.2bn) all priced deals on the same day. These and other sizeable deals, which sold in the last days of the quarter, highlight the climax the market experienced despite March’s turbulence.
High grade saves the day
Even though the quarter ended on a high note, it cannot be considered a regular credit cycle. On the contrary, after COVID-19 exploded, markets suffered sharp shocks and the bonds pipeline saw many deals postponed, especially from the corporate sector. Economic authorities did not hesitate, with central banks of the largest economies reacting to the crisis by announcing on March 15th a coordinated action plan that would provide strong stimulus packages to counter volatility and a potential crash of the ailing corporate segment. The news was accompanied by an interest rate cut by the US Federal Reserve, which seemed to take effect on the markets, as the dwindling corporate issuance rebounded on the next week and has not faltered since. But this is only true for investment grade deals, which went from $147.2bn distributed amongst investors in January to $320.1bn in March, of which A-rated tranches ($146.7bn) and Americas ($195.7bn) took the lion’s share. In contrast, high-yield issuance went from $81.1bn issued in January to a mere $5.4bn in March, outlining the dire situation the market is still experiencing.
Some sectors have come under the spotlight, since they are especially sensitive to economic shocks: oil & gas, transportation, hospitality and, on this occasion, healthcare and retail amongst others. The capacity of these companies to meet their payment events successfully is under close scrutiny, especially in the short and medium term. There are those that claim that it’s too soon to understand the real consequences of the current challenges, however some of these sectors have a tough year ahead to ensure maturing liabilities are paid off. Oil & gas is facing a total of $170.1bn of bonds maturing this year, healthcare has $118.5bn, and transportation’s maturing debt in 2020 totals $114.0bn. Issuance levels for these sectors, so far this year, are not extremely high: $48.5bn, $44.4bn and $37.0bn respectively. Nonetheless, this is more a question of financial and market strength than sectorial. Exxon Mobil priced an $8.5bn deal mid-March, Thermo Fisher did two deals in the same month ($2.2bn and €1.2bn) and UPS sold $3.5bn of paper to investors. This illustrates how large companies can weather the storm, leaving the struggle for survival to the weak ones.
Increased corporate issuance brings record wallet
The story of the COVID-19 crisis landing on the DCM space has had corporations as the main protagonists, because this sector is the one taking full advantage of the stimulus from central banks. Corporate issuance went up year-on-year by 14% in the first quarter, totaling $739.6bn of debt sold to investors. Other sectors went up too, but more evenly: FIG debt rose by 1% to $537.6bn, and SSA was up 2% to $550.2bn. Issuers from these segments also joined the corporate momentum in March and priced some large deals: Wells Fargo sold $6.0bn of notes and Bank of Beijing $5.7bn equivalent (CNY40.0bn); Spain was able to price a €10bn transaction in the last days of March, 133bps higher than the reference Bund.
The surge in record issuance also brought the largest revenue ever achieved by bond syndicates. A total wallet of $6.9bn was earnt by investment banks, of which $3.7bn came from corporate bonds (16% more than 2019 Q1), $2.0bn from FIG transactions (19% increase) and the rest was split between SSA bonds ($695.3m) and securitizations ($512.1m).
Asia Pacific hit hard by pandemic
Asia was the first region affected by COVID-19, thus what seemed to be a good start to the year went swiftly into contingency mode. Nonetheless, Asia Pacific international issuance saw $159.3bn worth of bonds sold in 2020 Q1, 4% higher than 2019. January was the most active month on record, with 29 deals priced, however, for the quarter accumulatively, deal count dropped year-on-year from 441 to 334. Despite this, bonds larger than $1.0bn were numerous, like other regions. They accounted for 15% of market activity with 49 deals, matching the highest deal number on record obtained in 2017 Q1. This first quarter also had the highest average number of bookrunners on a deal ever registered, a growing trend that went from 4 last year to 4.2 in the first quarter of 2020.
In South East Asia the corporate sector was highly active in 2020 Q1, raising $8.6bn via 24 deals sold to international investors. This marked the region’s highest Q1 volume on record. Oil & gas and real estate were the two main sectors driving issuance up, with $3.9bn and $1.3bn issued respectively. PT Pertamina (Persero) priced 2 deals in January and February, raising a total $2.95bn of funds.
China DCM volume in the first quarter of the year was $209.2bn, down by 18% compared to the same period in 2019. Deal count also dropped 29% to 747 deals. The outbreak of COVID-19 begun to generate a negative impact on the bond market in early February, on the cusp of the extended holiday season. Nonetheless, the Chinese authorities put in place monetary policies to counter the situation and help the market to recover. “Anti-epidemic” bonds were introduced by the regulator with a guaranteed fast-track approval process to ensure borrowers could raise funds with no delays. The aim behind these deals was to relieve corporate financial stress and enable firms to get funding to tackle the effects of the virus. “Anti-epidemic” issuance accounted for 10% of the total market.
Unlike the onshore segment, the offshore market went silent due to the economic and financial market volatility caused by the pandemic and the oil price war. Only 23 deals were completed in March, raising S$6.5bn, the lowest monthly volume since August 2019.
In Australasia, DCM volume allocated to investors hit a 5-year low, with only US$38.0bn raised from 106 deals priced, down 22% in volume and 38% in deal count. The corporate sector completed only 6 deals in the quarter, the lowest number of deals completed for any quarter since 2009 Q3. Meanwhile, FIG issuers executed 34 deals last quarter, down 57% from 79 deals in 2019 Q1. Notably, both Macquarie and NAB withdrew their capital note offerings in March due market instability, missing a total A$2.0bn of funding.
US market lifted by IG corporates
For the Americas bonds market the year started positively. Economic conditions looked promising, as trade relations between the world’s two biggest economies, US and China, started to improve. “Phase one” of the trade deal signed by both governments saw US tariffs on Chinese imports relaxed in exchange for large purchases of US goods by Chinese entities. Bond sales marketed in the US took advantage of the favorable situation and the debt volume allocated to US investors in January was the largest ever achieved on this month: $388.2bn via 954 deals. Activity remained consistent in February despite COVID-19 news ($269.4bn from 588 deals). In March, stock markets started to crumble and intervention from the Federal Reserve was required. The stimulus worked well for corporate and financial investment grade borrowers, who took the opportunity to price large deals. A total of $357.0bn from 388 deals were sold in March, the largest volume for this month since 2007. The first quarter totaled $1.01tr of debt bought by US investors, the second highest volume since 2007.
As for non-investment grade debt, the last high-yield deal priced by a corporate issuer was seen in the market on March 4th – the $400.0m worth of notes placed by Science Application International. After no activity for several weeks, and with economic stimulus calming down investors, Yum Brands stunned the market on the last day of the month by upsizing its 5-year notes by $100.0m, selling a total of $600.0m of junk debt. Corporate spreads followed the sequence of events too, with February showing lower average figures than January and March for both investment and non-investment grade corporate tranches. Not only the effects of the US-China trade deal influenced this success, but also a higher activity on US dollar paper in the main Asian markets (China, Japan and South Korea), which saw the American currency as a safe haven from the ongoing pandemic crisis in Asia. Things took a turn in March however, with renewed trade tensions coming back to the political arena, and the widespread impact of COVID-19. In this final month of the quarter, US IG corporate spreads were at their highest since July 2009, at 258bps, and a significant increase from the 125bps average from March 2019. While the high-grade segment was busier than the completely halted high-yield space, it came at a high cost thanks to the health crisis.
The other regions in Americas performed well. Bond issuance from Latin American borrowers made a comeback from a lackluster previous year. A total of $45.5bn worth of debt was sold in the first quarter of 2020, a 46% increase from the same period in 2019. Of that figure, 81% was allocated to US investors ($36.9bn), 88% more than the previous year. Similar to their Asian peers, Latin American borrowers also took advantage of the higher demand for US dollar bonds and tapped the market profusely in January and February.
– Written by Dealogic DCM Research
Data source: Dealogic, as of April 2, 2020