On Tuesday, Facebook parent Meta Platforms raised $10 billion in its first-ever corporate bond issue. But don’t expect other companies to follow suit.
Sharply higher interest rates and capital market volatility will weigh on U.S. nonfinancial corporate debt issuance through 2022, said Fitch Ratings at the end of July.
High-yield and investment-grade bond issues fell 26% in the first half of 2022 compared with a year earlier, according to data from the Securities Industry and Financial Markets Association. (See chart.)
Right now, investors think the tightening of monetary policy by the Federal Reserve is the biggest risk facing the corporate debt market, according to Bloomberg’s MLIV Pulse survey.
As interest rates rise, corporate debt gets more expensive, and the prices of bonds move in the opposite direction. In the second quarter coupons for corporate issues in the “A” and “BBB” rating categories averaged 4.4% and 4.6%, respectively, up from 2.5% and 2.5% in 4Q21.
According to a July credit investor survey by BofA Securities, both investment-grade and high-yield investors remain bearish on spreads. About two-thirds of investors surveyed by BofA expect wider investment-grade spreads in the next three months, the largest reading since the financial crisis.
That reading, of course, was before the slight easing of consumer price index inflation reported by the Labor Department on Wednesday.
The good news is corporate bond maturities are relatively light in 2022, according to Fitch, with $95 billion of investment-grade obligations and $13 billion of high-yield debt outstanding left to mature as of June 30. Investment-grade maturities will increase to $258 billion in 2023 and $294 billion in 2024.
“Record issuance in 2020 and 2021 to refinance high-cost obligations and increase liquidity during the pandemic [provided] many companies with flexibility in issuance timing and some capital allocation discretion,” the rating agency said.
Indeed, only about one-quarter of credit investors in the MLIV Pulse survey indicated corporate bankruptcies were the biggest risk to the bond markets. Bond defaults are still only projected to hit 2% to 3% in the next 12 months.
But that’s not a certainty, of course. Said Som-Lok Leung, executive director of the International Association of Credit Portfolio Managers, last month: “Defaults are currently at rock-bottom but that will change as we go through the year. Consumers and businesses have a bit of a cushion for now but our members expect to see significantly higher numbers of defaults in 2023 and perhaps even into 2024.”
Credit portfolio managers are worried that the Federal Reserve’s rate-setting Open Market Committee could go too far in trying to tame inflation, Leung said. “The risk of monetary policy is well known and well entrenched at this point as is the continuing risk of inflation and the threat of recession,” he added. “Risk is high and it’s everywhere.”