After 2020’s Record Bond Issuance, What Will 2021 Look Like?
New bond issuance exploded to record highs in 2020. Amid the crisis of a Pandemic, companies were anxious to tap the markets and investors were happy to oblige. What was in it for issuers? In an uncertain time, they were still able to offer debt with historically low coupons while building up cash. On the other hand, investors, who had faced very narrow spreads for months, were attracted to high-grade and high-yield bonds trading 200+ basis points cheaper than just a month prior. The result was relative supply and demand balance—during a crisis.
No surprise, 2020 statistics were dramatic
Who issued debt?
Amazingly, mergers and acquisitions (M&A) financing, normally a significant supply source, made a limited contribution to 2020’s IG and HY record supply. Instead, issuers in both markets focused on liability management, resulting in $150 billion of IG bond tenders (up 33% from 2019) and $280 of HY tenders. Issuers sought to remove near-term maturity risk where possible. We even saw issuers tender for bonds that they had just brought to market months prior.
In IG, we estimate a more manageable $1.2 to $1.3 trillion will come to market in 2021. In the HY market, we expect approximately $375 billion this year. Overall, we envision more supply stability given positive pandemic trends and less economic uncertainty.
After a robust pace of supply in the first quarter, issuance is almost flat to where it was this time last year. We believe supply will likely slow comparably throughout the remainder of the year, which could be a favorable technical environment for spreads.
What to watch
Interestingly, HY new issuance has moved down in quality. Only 20% of issuance this year has been in BB credits. So far in 2021, the HY primary market appears open for lower-quality refinancing.[i]