On Tuesday, Facebook’s parent company, Meta Platforms, raised $10 billion in its first-ever corporate bond issue. But don’t expect other companies to follow suit.
Sharply rising interest rates and financial market volatility will weigh on US non-financial corporate debt issuance through 2022, Fitch Ratings said in late July.
Issuance of high-yield and investment-grade bonds fell 26% in the first half of 2022 from a year earlier, according to data from the Securities and Capital Markets Industry Association. (See chart.)
Right now, investors believe the Federal Reserve’s monetary policy tightening is the biggest risk facing the corporate debt market, according to Bloomberg’s MLIV Pulse Survey.
As interest rates rise, corporate debt becomes more expensive and bond prices move in the opposite direction. In the second trimester coupons for corporate broadcasts in the “A” and “BBB” rating categories averaged 4.4% and 4.6%, respectively, compared to 2.5% and 2.5% in 4Q21.
According to a July survey of credit investors by BofA securities, quality and high yield investors remain bearish on spreads. About two-thirds of investors surveyed by BofA expect wider investment-grade spreads over the next three months, the biggest reading since the financial crisis.
This reading, of course, was before the slight slowdown in consumer price index inflation reported by the Department of Labor on Wednesday.
The good news is that corporate bond maturities are relatively light in 2022, according to Fitch, with $95 billion of investment-grade bonds and $13 billion of high-yield debt remaining due as of June 30. Investment-grade maturities will drop to $258. billion in 2023 and $294 billion in 2024.
“Record issuance in 2020 and 2021 to refinance high-cost bonds and increase liquidity during the pandemic [provided] many companies with flexibility in issuance timing and some discretion in capital allocation,” the rating agency said.
Indeed, only about a quarter of credit investors in the MLIV Pulse survey indicated that corporate bankruptcies posed the biggest risk to bond markets. Bond defaults are still only expected to reach 2-3% over the next 12 months.
But this is 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 an all-time low, but that will change as the year progresses. Consumers and businesses have some cushion at the moment, but our members expect to see a significantly higher number of defaults in 2023 and possibly even 2024.”
Credit portfolio managers are concerned that the Federal Reserve’s rate-setting open market committee is overcorrecting for inflation control, Leung said. “The monetary policy risk is well known and entrenched at this stage, as is the lingering risk of inflation and the threat of recession,” he added. “The risk is high and it’s everywhere.”