Capital Markets

Bonds Hit Record in First Half, But Now What?

The volume of corporate bonds issued during the first half of 2007 was 22.7 percent higher than last year's first and second quarters, according to...
Stephen TaubAugust 29, 2007

Call it the boom before the storm. Corporate bond issuance set a new record in the first half of the year. Indeed, issuance volume rose in the first half to a $647.3 billion record, a 22.7 percent increase over the first half of 2006, according to a new report by the Securities Industry and Financial Markets Association (SIFMA).

However, those high numbers are sure to decline in the latter months of 2007. “Issuance flourished in the second quarter as financial market conditions peaked,” said Michael Decker, senior managing director for research and public policy at SIFMA. “Looking ahead, the second half outlook is clearly being affected by much weaker market conditions, the result of spillover from the subprime market, credit risk repricing, and dramatically reduced liquidity.”

In its report released on Wednesday, SIFMA said second-quarter volume increased 12.6 percent to $342.9 billion, up from $304.4 billion in the first quarter and 22.9 percent higher than the $278.9 billion in the second quarter a year ago. In addition, non-convertible investment-grade gross issuance increased 19.4 percent to $551.8 billion through the first half of 2007, substantially higher than the $462.1 billion issued during the same period a year ago. Moreover, issuance in April set a monthly record, with volume reaching $125.2 billion, surpassing the previous record set earlier this year.

Non-convertible high-yield debt (below BBB-rated) issuance increased to $95.5 billion in the first half of 2007, a 45.8 percent increase over the $65.5 billion issued in the first half of 2006. According to the report, this trend was boosted by increased average issue size, which rose to $501 billion in the first half, up from $436 billion during the same period a year ago.

Total issuance of new securities in the U.S. capital markets rose to $3.57 trillion in the first half of 2007, a 10.4 percent increase over the first half of 2006.

SIFMA attributes these higher numbers to a high level of liquidity. Although most corporate credits outside the real estate lending sector have fundamentally not changed during the last few quarters, market conditions have significantly weakened since the end of the second quarter, it added. The result is dramatically reduced liquidity, fewer bids, difficulty in financing deals and converting bridge loans into permanent LBO financing, and dealer risk reduction strategies, according to the report.

In other markets, first-half issuance of medium-term notes (MTNs) grew to $199 billion through the first half of the year, a 24.8 percent increase over the $149.5 billion issued during the first half of 2006. MTN issuance in the second quarter totaled $93 billion, down 12.2 percent from $105.9 billion in the first quarter and down marginally from the $93.3 billion issued during the same period a year ago. “MTN first-half growth reflects issuer demand for debt financing in the first quarter by new entrants to the market, and a holding pattern by private equity to gauge access to acquisition financing,” the report noted.

Convertible issuance — including investment-grade and high-yield issues — increased to $48.9 billion in the first half of the year, up 57.2 percent from the $31.1 billion issued during the same period in 2006. The report noted that the growth of convertible bond issuance reflected the equity markets boom in the last nine months and investors’ desire to take advantage of the upside of equity price appreciation. “As with other corporate bond sectors, second half volume is likely to trend lower reflecting market conditions,” it added.