Investment grade euro denominated corporate issuance for 2021 was trudging along at €356bn by mid-November, just as an end of year issuance spurt typified by small benchmark-sized deals was getting under way.
A year earlier, when issuers were in the midst of the corona-virus pandemic and raising funds from every avenue available — from dusty, never drawn revolving credit facilities to billions of new debt on the bond market — the end of November had seen €499bn of primary market issuance for the year, according to Dealogic.
Even ignoring 2020, a freak year against almost every metric, 2019 boasted €403bn of issuance by the end of November, and €413bn for the entire year.
The main reason issuers kept away from the bond markets in 2021 was that they were still sitting on the enormous cash piles they had built up a year earlier. This is widely expected to change in 2022.
None of the syndicate officials surveyed, admittedly before the Omicron variant emerged, thought that 2022 would have less issuance than 2021. Only one thought that issuance levels would be around the same.
There was some disagreement over how optimistic to be for 2022 volumes. Most respondents, 81%, thought that issuance would be higher, but not more than 20% higher in volume than the market saw in 2021.
If the majority’s prediction is correct, syndicate desks can expect to place about €420bn of deals in 2022.
There were some outliers who were even more optimistic, with 12.5% of respondents reckoning that issuance in 2022 will be more than 20% higher than it was in 2021.
Much of this issuance is likely to come from a resurgence of M&A activity, according to multiple respondents. In 2020, no sector leapt on pandemic-created opportunities as readily as the real estate sector, going from sixth biggest to the biggest issuer in Europe’s high grade corporate bond market. By October, property companies had printed €45bn in bonds, despite having only €1bn of redemptions due in 2021.
Germany’s Vonovia stole the show, printing a €5bn multi-tranche trade in August to finance its acquisition of Deutsche Wohnen. At the time, Vonovia’s deal was the biggest of the year, and was trumped only by Thermo Fisher Scientific’s €5.25bn M&A related trade in October.
Multiple syndicate officials said they thought technology — in particular, business-to-business and white collar work technology — is ripe for consolidation in the coming year.
Spreads edging upwards
The sort of market that will be waiting for issuers is under intense debate. If 2021 was characterised by investors bursting at the seams with cash that they were desperate to put to use, 2022 is expected to see the needle swing the other way, with borrowers needing to be nimble if they are to get the most out of an increasingly hostile, volatile market.
Every banker questioned believed that spreads would either stay the same or rise, with by far the majority of bankers falling into the latter camp. In total, 87.5% of respondents said they thought credit spreads would rise in 2022, with the remaining believing they would be largely flat.
“Spreads have come grinding in all year,” said one syndicate banker who thought a rise was coming in 2022. “Investors are already becoming more picky with what they buy. If issuance starts again at decent levels, they are not going to go chasing deals all the way down like they were at some points in 2021.”
The spread rise is likely to be smooth and steady, with almost all respondents believing that credit ratings in the sector are likely to, on average, stay the same in 2022. Only 12.5% thought that they would fall.
The net balance between credit rating moves for corporates globally typically varies between 2% either way over the course of a year, according to research from credit risk aggregator Credit Benchmark. The onset of the coronavirus pandemic saw a negative move in global corporate credit ratings of almost 5%, while the recovery at the end of 2021 saw an almost 6% net positive move in ratings.
Clearly, Europe’s high grade corporate syndicate bankers believe that rating agencies have made the majority of the moves they are going to make relating to the coronavirus pandemic, and 2022 should be a smoother year for ratings action than the past 12 months.
Rather than rating cuts, a big driver of spread rises in 2022 is likely to be focused on macro events, in particular inflation and central bank reaction to it, and their potential effect on pandemic-era monetary policy. Inflation, which had been widely expected to prove transitory, remained stubbornly high across Europe in the latter half of 2021.
Bank analysts see inflation in the UK hitting 4.5% in 2022, peaking in April, and many in the market were shocked that the Bank of England did not raise its interest rate from its record 0.1% low at the start of November to combat the rising cost of goods and services. Despite the November surprise, the BoE is still expected to be the first of the most important Western central banks to raise rates since the start of the pandemic
Meanwhile, Christine Lagarde at the European Central Bank said in November that rate rises are unlikely in 2022, though not impossible. Eurozone inflation was running at 13 year highs in October of 4.1%, up from 3.4% a month earlier. In the US, inflation hit a 30 year high of 6.2% in October, and the Fed has started tapering its monthly asset purchases of Treasury and mortgage bonds by $15bn from December.
Get it while you can
With so much potential for macroeconomic upset, corporates might be tempted to come to the market sooner rather than later, and frontload their issuance into the first quarter of the year.
Of those asked, 25% of syndicate bankers thought that there would be more frontloading of issuance among Europe’s top rated corporate names, while 12.5% reckoned that corporates would not come to the market any sooner to try to mitigate potential rate rises.
The remaining 62.5% of respondents thought that corporates would load supply into the early stages of the year, but not any more than usual. This means refinancing exercises due in 2022 should be taken care of in the first half, with the second half more likely to be populated with juicy M&A related deals, if Europe’s syndicate bankers are correct in their forecasts.
Despite the potentially volatile rates environment and high inflation, syndicate bankers are unanimous in their belief that investment grade corporates will not face refinancing risk as a result of rate hikes. All respondents said it was “unlikely” that borrowers would struggle to refinance their debt in 2022. “You had airlines getting deals done this year,” said one respondent. “There will be a price to pay, but look at the low coupons some of these troubled sectors are paying.”
It is not just the euro markets open to many of Europe’s high grade corporate bond issuers, however, with many names opting for dollar deals in 2021 as well as trades in their home market. BMW printed $2bn in March from a $7bn book, and in July Italian utility Enel sold the largest ever sustainability-linked bond into the dollar market in a $4bn trade that garnered $12bn of demand.
A chunky 37.5% minority of Europe’s syndicate bankers, some of whom have consistently been bullish on the US domestic market for European corporates in conversations with GlobalCapital throughout the past year, thought that the dollar market would provide a better source of funding for corporates with access to both markets.
Only one respondent thought euros would be better, while the remaining bankers said that both markets would prove roughly equivalent. The consensus among these respondents is that dollars would be there for large sizes, such as M&A, while euros would be available for miniscule coupons.
Lustre leaving ESG
Europe remained the dominant market for environmental, social and governance bonds in 2021 and this should continue throughout 2022. But the spread benefit that issuers get might start to dissipate as the year goes on.
At the beginning of 2021, ESG bond issuers could expect to enjoy a 5bp-7bp greenium over their conventional curves. A quarter of survey respondents thought that this greenium level would hold throughout 2022 — this despite new ESG deals in the September and November 2021 issuance windows seeing the greenium vanish completely, with some corporate issuers even needing to pay a premium over their conventional curves.
As such, the majority of respondents, some 62.5%, think that ESG issuers will see a smaller benefit over their conventional curves in 2022, with average greeniums sitting at around 1bp-5bp.
One particularly pessimistic respondent thought greeniums would fall to zero. However, while his syndicate rivals may disagree, a growing number of ESG bankers and corporate treasurers also believe that the greenium is on borrowed time as ESG capital structures become the norm. With corporates such as Enel and Total committing to issuing only sustainability-linked debt from now on, and others set to follow, the mainstreaming of ESG finance is already well under way. GC