After record-breaking supply in 2020 with €645.7 billion and £56.7 billion issued in the euro and sterling investment grade corporate bond markets, respectively, issuance in 2021 has been relatively muted with forecasts now calling for €520 billion and £60 billion in 2021.
Year-to-date issuance in the euro-denominated corporate bond market has come in well below both 2020 levels and initial expectations despite low funding costs, explained largely by a decline in nonfinancial issuance. As of the end of October, gross nonfinancial supply is almost €150 billion lower year-over-year, as continued accommodative monetary policy from the European Central Bank and aggressive prefinancing in 2020 have limited the need for issuers to tap the bond market in 2021. Additionally, there has been a reduction in issuance from U.S. issuers with the flexibility to issue in the euro bond market, as low FX hedging costs have USD and EUR investment grade corporate bonds looking equally attractive to investors.
While sterling corporate market issuance is projected to come in slightly ahead of 2020 levels, the drivers of issuance are unique, as issuers were not as aggressive in utilizing the GBP market to raise excess liquidity in 2020. Given the recent outperformance of the sectors most heavily impacted by the pandemic, there has been an uptick in opportunistic issuance from domestic real estate names to secure funding at a lower cost than they would have been able to in 2020 amid market volatility caused by the pandemic. More importantly, the Bank of England has taken a more hawkish stance than both the ECB and Federal Reserve in the second half of the year, leading issuers with GBP funding needs to pull forward issuance to lock in funding ahead of potentially higher rates.
Issuance in 2022 should be manageable for both markets as the expectation for higher rates has led many issuers to pull forward issuance to lock in low-cost borrowing. However, there are several potential risks: Continued supply chains constraints and labor shortages will likely force increased spending on capex, raising borrowing needs, while management teams could become more aggressive with debt-financed M&A and shareholder return strategies. Finally, as investors continue to push issuers to pursue sustainability targets, companies could be forced to increase leverage to meet aggressive climate transition goals. Looking ahead, investors will be weighing the marginal positive for credit spreads from lower supply against the backdrop of a potential rising rate environment.