S&P Sees Extra $6.6 Trillion in Global Corporate Bond SalesBenjamin Purvis
Non-financial companies around the world are poised to raise $6.6 trillion or more from new bonds and other debt securities in the five years through 2018 as they increase reliance on capital markets, said Standard & Poor’s.
Debt markets are providing more appealing terms for borrowers as investors’ search for higher-yielding securities spurs demand for corporate paper and bank loans are constrained, S&P said today in a report. The ratings company predicted that the bond sales would form part of a total new funding requirement of as much as $21.7 trillion through 2018 for corporate borrowers in Asia, Europe and the Americas.
The hunt for additional returns has been driven by a global collapse in yields as the world’s major central banks hold benchmarks near zero and implement unprecedented monetary easing. Demand for credit has compressed spreads and the average yield premium over swap rates for corporate bonds this month fell to 97 basis points, the least since December 2007, according to a Bank of America Merrill Lynch index.
“For the U.S., though we envision commercial banks to make a comeback, we project the share of debt securities to continue to rise,” S&P said. “Given a growing demand for yield alternatives, robust debt issuance will likely continue, supported by attractive interest rates as well as an expanding investor base willing to extend corporate issuers with lucrative credit and maturity terms.”
U.S. non-financial corporates are expected to issue about $2.5 trillion of bonds, while the European equivalent will be about $1.5 trillion, S&P said. Chinese companies will sell $1.3 trillion worth of notes and the rest of the Asia-Pacific region about $900 billion. The combined number for Brazil and Mexico is forecast to be in the region of $200 billion.
“You’re getting more and more different issuers who may have previously accessed funding through bank channels that are now doing more of it through capital markets,” Ashley Perrott, the Singapore-based head of pan-Asia fixed income at UBS Global Asset Management, said in a phone interview today. This process is particularly notable in emerging markets, he said.
Bond issuance by companies other than financial services providers was $1.69 trillion globally last year, more than double the $758 billion of notes sold in 2008, according to data compiled by Bloomberg. They have sold $856 billion of bonds so far in 2014, with JPMorgan Chase & Co. and Bank of America Corp. the leading underwriters.
Total demand for debt including new and refinanced loans and bonds is expected to be as much as $60 trillion over the five-year period, according to S&P.
In the U.S., overall borrowing for the period is projected by S&P to be as much as $14 trillion. Just under a third of that will be new financing, the bulk of which will be used to fund capital spending and an increase in acquisitions, its analysts wrote.
While U.S. companies have accumulated more cash on their balance sheets, much of that is overseas and expensive to bring home. A mismatch between where companies need cash and where they generate it has led to synthetic repatriation of funds through equivalent debt issuance, according to S&P. Over the past three years, debt has increased at 3.67 times the pace that cash has expanded, S&P data show.
Companies in the Asia-Pacific region are set to implement as much as $32 billion of new funding and refinancing in the 2014-2018 period, with those in China set to raise as much as $20 trillion, the S&P report shows.
Borrowers in the world’s second-largest economy already borrow more than their American counterparts, according to an S&P report dated June 15. Those from China had $14.2 trillion in debt at the end of last year, exceeding every other country including the U.S., which had $13.1 trillion in company obligations.
In the euro area, bank loans are unlikely to maintain their share of corporate funding, although “the trend away from banks providing term debt to larger corporate borrowers still has a long way to travel in Europe,” S&P said today.