Global corporate bond issuance moved over the US$3 trillion level in November and the total for 2013 is set to exceed year-end 2012 levels, says Standard & Poor’s (S&P).
If this materialises, the 2013 bond issuance total will be the second highest total on record, exceeded only by 2009 when significant government assistance globally pushed issuance levels above US$3.3 trillion.
The credit ratings agency (CRA) notes that investors’ willingness to lend money and the low cost of capital have allowed many companies to pursue capital-intensive projects, make strategic acquisitions, and refinance obligations, which extended maturities and lowered funding costs.
With relatively few alternatives to improve yield, investors were eager to lend even to entities with lower credit quality. By the end of 2013, global corporate speculative-grade – those rated BB+ or lower – bond issuance will likely exceed US$500bn for the first time, and comprise more than 15% of the 2013 total issuance. To put this in perspective, speculative-grade bond issuance was US$208bn and US$213bn, respectively, in 2006 and 2007 before the global recession, and was as low as US$56bn in 2008.
Even entities at the lowest end of the ratings spectrum were able to come to market, which is partly the reason why defaults have been less frequent in 2013. Globally, only 2.2% of speculative-grade companies defaulted in the 12 months through the end of October 2013, down from 2.5% in 2012.
S&P predicts that the attractive risk-return trade-off in a low default environment and the stronger economic growth that the CRA expects in much of the globe are catalysts for investors to continue to provide funding in the credit markets in 2014. From the high levels reached in 2013, it expect corporate new issuance to grow modestly in 2014 at a rate between flat and 6% higher.
“We are mindful that corporate leverage is growing, although it is still manageable, and this could give investors pause,” the CRA adds. “Funding for less credit-worthy entities is usually the first to dissipate when investor confidence starts to fade.
“Moreover, the prevalence of refinancings in the last two years tempers our expectations in 2014 to the extent that upcoming maturities have been pushed to the outyears. However, many companies will likely continue to pursue debt refinancings in 2014 because maturing debt in 2015, 2016, and 2017 remains significant at US$1.4 trillion in 2015 and US$1.2 trillion each in 2016 and 2017.”
Among S&P’s other predictions:
- The US Federal Reserve will begin reducing its asset purchases at its next policy meeting on 17-18 December, but maintain some form of asset purchases well into 2014. The CRA does not expect the Fed to increase its benchmark federal funds rate until 2015 and says that the deliberate and transparent policy process should reduce the possibility of a disorderly response from the market.
- In Europe, S&P expects to see companies continuing to tap the capital markets, not just to refinance maturing bonds, but also to undertake bonds for loan take outs and raise new capital to fund mergers and acquisition (M&A), capital expansion, and diversification plans. European banks remain reluctant to lend as they continue to restructure their balance sheets in 2014 in anticipation of new regulatory rules.
- With its expectation of slightly slower Chinese economic growth in 2014, S&P predicts that growth in corporate bond issuance will decelerate compared with the rapid credit growth of recent years, but still remain strong. With the risk of a hard landing in China diminished, together with improved prospects for global trade, investors are likely to remain interested in China, further helping credit markets to grow.
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