There was no particular reason to suppose debt market conditions would have changed with the onset of 2021. (They didn’t.)
And if market participants have not been fazed by worsening Covid statistics into the year-end and lockdown measures in Europe and the United States to counteract the impact of rising infection rates and new strains of the virus, why would they be fazed by the storming of the Capitol Building in Washington, DC? (They weren’t.)
Around 250 issuers stormed the bond market in the first two weeks of 2021 to raise around US$370 billion equivalent, according to Bond Radar data. Pretty much everything that hit the market was oversubscribed as investors with cash at the ready returned to the fray, still vying with central banks for a piece of the action and bidding resolutely and with purpose.
There’s been something for everyone across all borrower segments and in investment-grade, high-yield and emerging markets. Very notably, more than 10% of total primary debt flows in the first two weeks of 2021 were green, social, sustainable or sustainability-linked.
From a sector/geographical perspective, one of the standouts has been the Chinese high-yield real estate plays that have been out in force. Around 25 Chinese property names had accessed the dollar bond market by the close of play on January 15 to raise close to US$9 billion since the start of the year. In aggregate, their issues were prodigiously oversubscribed, eliciting in excess of US$60 billion to US$70 billion of demand. With some issues sporting double-digit US dollar coupons, the attraction isn’t hard to fathom.
Primary debt flows in the first 10 business days of January this year exceeded those of the same period of 2020 by around 5%; and the market was on a pre-Covid tear at that point. Following that brief, if worrisome, period of volatility in March 2020, the massive amounts of fiscal and monetary injections hurled into the market to prevent disorderly cliff effects saw bond issuers take full advantage of the tightening of credit spreads it created. Global DCM activity hit an all-time record of US$10.2 trillion in 2020, Refinitiv noted. That’s a staggering amount of money.
Given the specific circumstances of 2020, debt issuance volumes this year will likely not match those of full-year 2020 as it’s likely a fair amount of pre-financing was done in anticipation of redemptions this year while the market was wide open and issuers could achieve very good execution (the “get it when you can” funding strategy).
What looks more certain to continue intact is the wave of mergers and acquisitions (M&As) that started in the second half of 2020, leading to an all-time record for the half-year.
M&A is partly a confidence play on the underlying economy so a lot will depend on general sentiment and the extent to which the coming year sees a claw-back of economic production lost to the pandemic-induced recession of 2020. It will also depend on what happens when government and bank support programmes start to be withdrawn and we start to see the real impact of the pandemic in terms of corporate and consumer distress, levels of defaults, and the extent of banks’ non-performing loans.
Assuming the roll-out of the Covid vaccine goes to plan, assuming GDP data don’t shock to the downside and assuming we see valuations stabilize, we could see an M&A jamboree as financial sponsors and trade buyers alike jump opportunistically on the chance to take the other side of a deleveraging wave by Covid-damaged sellers through spin-offs and carve-outs. Or look to build out client and market footprints and create more resilient businesses at the same time as taking out costs.
It’s worth noting that the first and second waves of Covid gave buyers (and sellers for that matter) valuable experience in tracking impacts on countries, sectors and companies. Unless something emerges that is genuinely unforeseen, that experience could see dealmakers more confident in taking the plunge and investing. And let’s not forget: there is also a lot of unfinished pre-Covid consolidation activity left over that could push activity into the leveraged-buyout (LBO) and M&A markets in 2021.
After an off-year for syndicated lending (owing to wider pricing, a shortening in tenors, drawdowns in revolving credit facilities and bond market substitution), banks and institutional lenders will likely be up for backing M&A and LBO activity in size to bulk out their fee-take. Bond market take-out options might not be a 100% given but they’re a near-certainty at worst. Acquisition financing will likely be seen as a sound opportunity for bond investors to book some decent spread.