People watch the departure of a cruise ship
Cruise ship operator Royal Caribbean launched a $1bn bond last Tuesday © Sebastien Salom-Gomis/AFP/Getty Images

Companies raised more than $100bn on the bond market in the first week of this year as finance chiefs kicked off an effort to lock in low borrowing costs before benchmark interest rates start to climb.

Global corporate bond issuance reached $101bn in the year to January 7, with US deals reaching a record pace. The global haul trailed only a blockbuster $118bn start to 2021, which was the highest on Refinitiv records going back 19 years.

The corporate bond market typically revs up at the start of the year after a sleepy period around the holidays in late December. But the rush of new deals offers an early glimpse at the barrage of issuance expected early this year, as companies look to tap debt markets before major central banks begin raising short-term interest rates, something that increases the cost of borrowing across the economy.

“It was obviously very active out of the gates,” said Dan Mead, head of investment-grade syndicate at Bank of America. “There is an expectation among our issuers that rates are likely going to continue to trend higher from here. They will try to take advantage of the market now while there are favourable conditions to lock in those rates.”

Deals have been dominated by banks and other financial issuers, especially foreign institutions raising funds in US markets. A host of blue-chip names such as insurer MetLife and heavy machinery maker Caterpillar have also sold new bonds.

Column chart of Corporate bond issuance ($bn) showing Companies race to raise fresh funds in 2022

Highlighting the easy access to financing across corporate America, cruise operator Royal Caribbean launched one of the first deals in the lower-rated junk bond market, with a $1bn issue last Tuesday.

Even pandemic-stricken cinema chain and darling of the Reddit trading community AMC Entertainment declared its intention to test investor appetite for risky debt. In a tweet, chief executive Adam Aron said he hoped to refinance pricey debt assumed in the past two years, pushing out maturities and easing up terms.

The breakneck pace continued on Monday, with a raft of new debt scheduled ahead of what is expected to be a slightly slower period during the corporate earnings season that unofficially begins on Friday.

However, bankers and analysts said challenging market conditions in the early days of 2022 may present a hiccup to issuers’ plans. Debt and equity markets have sustained a bout of volatility since last Wednesday, when the Federal Reserve firmed up signals that interest rates could rise sooner and faster than investors generally expected. The tech-heavy Nasdaq Composite has slipped about 8 per cent from its November high, while yields on US government bonds have shot higher.

The moves contributed to a contrasting start for new equity issuance, which slid to just over $7bn in the first week of 2022, down from north of $22bn in the same period the previous year. Additional share sales from companies that are already publicly listed dominated, and even that new business more than halved from 2021. Still, overall issuance remains elevated by historic standards, with 2021 an anomaly in the traditionally slower first days back for equity issuance following a new year.

The effect of choppy markets was also noticeable in debt markets. Investors pulled some orders for new bond deals last Wednesday, the day the Fed released the minutes from its December meeting, bankers said.

“It’s been a solid start to the year, but it’s indicative of a financing environment that will be a little more difficult to navigate than we saw in 2021,” said Jonny Fine, head of investment-grade debt issuance at Goldman Sachs.

The push higher in Treasury yields translates to higher borrowing costs for companies, weighing on the value of existing bonds that offer investors a lower rate of interest. At the same time, this has encouraged companies to come to market quickly before borrowing costs jump.

Already this year, the average yield on investment-grade bonds has risen from 2.36 per cent to 2.55 per cent, according to an index run by Ice Data Services.

Line chart of Yield for high-grade bonds* (%) showing US corporate borrowing costs have already started to rise

In US stock markets, it was biotechnology companies — seen to be less sensitive to the broader market — that led the few public listings to begin trading. But volatility stemming from the re-evaluation of monetary policy was still evident as Vigil Neuroscience slid from its list price of $14 to $11.41 and Amylyx Pharmaceuticals dropped from $21 to $16.72. 

The tepid response to new listings in the US may be tested again this week, with private equity group TPG and HR software company Justworks potentially beginning trading, as investors grapple with the heightened attention across capital markets that is now given to perceived shifts in the Fed’s thinking.

“A lot of clients are very focused on the macro picture and what might happen to inflation rather than corporate fundamentals,” said Brad Elliott, a credit strategist at Barclays. “The focus has pretty much shifted to what the Fed is going to do.”

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