Photographer: Simon Dawson

Citi: There's Been a Worrisome Change in the Market for New Corporate Debt

More "no go" days are going on.

Welcome to the 2016 corporate bond market. It's a lot like the 2015 corporate bond market—except in one crucial way.

So far this year, sales of new investment-grade bonds are running at about $200 billion, according to figures from Citigroup Inc.—or some 14 percent ahead of sales for the same period in 2015, which proved to be a record year in terms of bond issuance.

The $200 billion figure conceals two things, however. One is the outsized influence of a supersized debt deal to fund Anheuser-Busch InBev NV's takeover of SABMiller Plc. Strip the beer bonds out and issuance for the period is 12 percent lower year-on-year. The second is the increasingly stop-start nature of the primary market in which companies sell new debt to investors.

"It’s the increased irregularity of the new issue flows that’s concerning, particularly since we may have something on the order of $570 billion of maturities to get refinanced by year-end," write Citi analysts led by Stephen Antczak. "Throw in the M&A pipeline, and it’s a large number to push through a stop-and-go primary market."

Indeed, by Citi's calculations the market for significant new investment-grade deals saw 75 "no go" days over the past 12 months, in which the primary market was essentially shut. That's a higher rolling 12-month figure than was seen during the depths of the financial crisis in 2008 to 2009.

Source: Citigroup

New issue concessions have by necessity become somewhat juicier as companies are forced to lure investors back into the market with higher yields.

Of course, things are even worse in the high-yield market where companies with more fragile balance sheets sell their junk-rated debt. Here issuance so far this year is down 75 percent compared with the same time period in 2015, with two major deals accounting for almost a third of that supply. Similar to the investment-grade market, here too M&A has driven a large chunk of the issuance.

And while it's easy to attribute the increasingly fickle nature of the primary bond market to intense bouts of broader volatility across global markets, Citi does see something slightly more worrying adding to its woes.

"The second factor is the weakening fundamental backdrop—more leverage, falling profits, downgrades, etc.," the analysts say. "We’ve seen volatility in recent years that didn’t result in as sharp a rise in no-go days thanks to a healthier fundamental backdrop, or at least [a] more supportive Fed[eral Reserve]. But in the current environment, we really don’t have an offsetting factor to volatility."

Trends in the primary market can end up impacting the secondary market where previously sold bonds trade (and vice versa), with the potential to create contagion if companies find they are unable to refinance existing debt. 

"Given that volatility has ebbed in recent trading, it’s important to monitor how broadly the primary markets open," Citi concludes.

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