Primary investment grade bond issuance surged in Q1 2024 as investors ramped up exposure to high-quality borrowers in a high interest rate environment.
In the US, investment grade corporate borrowers secured US$429.7 billion of financing in Q1 2024; the highest level of quarterly issuance since Q2 2020, according to S&P Global.
European investment grade issuance was similarly strong, reaching €311.4 billion in Q1 2024, more than two-and-a-half times greater than the preceding quarter and 21% above the figures posted in Q1 2023. This made Q1 2024 the best quarter for European investment grade issuance since 2010.
On both sides of the Atlantic, companies have been able to take advantage of buoyant activity and strong investor appetite to secure large bond financings with long-dated maturities. In the US, blue-chip companies, including Abbvie, Cisco and Bristol Myers Squibb, have all raised bond financings exceeding US$10 billion in 2024, while in Europe, health care company Merck & Co. offered a 30-year security to investors, the longest-dated European corporate bond since 2021.
European companies have benefitted from an appetite for long-dated bonds as they offer lower borrowing costs than shorter-dated debt. In the automotive space, Stellantis placed a €500 million green bond on the Euronext Dublin on March 19, almost a year after issuing its first green bond in March 2023. Stellantis will use the proceeds of its latest issuance to finance investments and other spending on green projects.
Elevated interest rates put investment grade in the spotlight
The robust demand for investment grade debt has been driven by the improving yields that this debt now presents for investors in a higher interest rate environment, and the protection against downside risk that higher-rated issuers offer.
As central banks in the US and Europe raised interest rates to combat inflation, the returns available from relatively safe assets in the investment grade space became much more attractive to investors. Prior to the rate hikes, investment grade debt would have delivered flat or even negative returns, which drove investors to pursue better yields in the riskier sub-investment grade market.
But with rates now so elevated, investment grade debt has clearly become the preference, supporting a liquid market with good pricing.
Corporate issuers return after a 24-month hiatus
Although interest rates have raised financing costs for issuers when compared to 2021, borrowing costs for US and European companies have fallen to two-year lows in March. This gives issuers a more stable backdrop when returning to the market.
Corporate issuers have also taken advantage of strong investor demand for investment grade debt after volatile macroeconomic conditions limited the scope for borrowers to tap debt markets over the past 24 months.
The full-scale invasion of Ukraine in 2022 combined with rising energy prices and macroeconomic volatility suppressed debt issuance as investors paused to assess the effects of the crisis and borrowers avoided taking on additional debt.
However, after two slow years, interest rates and energy prices have stabilized. Investors have started deploying capital again and borrowers who had delayed raising finance have returned to the market.
The recovery in investor appetite has been timely for frequent investment grade issuers who are facing a steady stream of debt maturities in the coming year. Non-financial investment grade issuers face US$914 billion of maturities in 2024, rising to US$1 trillion by 2026.
Steady issuance in Q1 2024 has, however, helped to clear large sums of maturing debt. Non-financial investment grade maturities are forecast to recede from 2026 onwards.
Although refinancing activity has been the main driver of issuance, there have also been opportunities for issuers to raise capital for M&A. AbbVie raised US$15 billion on bond markets to finance its acquisitions of ImmunoGen and Cerevel Therapeutics, and the Cisco Systems and Bristol Myers Squibb bonds were also issued to finance M&A deals.
In Europe, Schaeffler issued a €850 million bond in Q1 in which it will use some of the proceeds to refinance the acquisition bridge facility for its takeover of electric vehicle specialist Vitesco Technologies.
Another notable development during the first few months of 2024 has been the revival of “reverse Yankee deals,” or transactions in which US companies tap the euro-denominated debt market. Expectations that the European Central Bank will begin to cut interest rates before the US Federal Reserve have seen companies pursue euro-denominated bond issues. As of mid-May 2024, American companies had raised around €30 billion in debt this year in reverse Yankee deals. For example, Johnson & Johnson raised €2.5 billion to partly fund its purchase of medical instruments specialist Shockwave Medical.
Getting financings done ahead of the elections
In addition to catching up after two slow years, the flurry of investment grade activity in Western markets has also been spurred by the looming elections in the US and UK.
Issuers are taking the opportunity to raise debt in H1 2024 before the summer lull and election cycle in H2, when investors might pause deployment and await post-election clarity.
There are hopes that the central banks in Europe and the US will begin to cut interest rates in the coming months, potentially leading to lower financing costs for borrowers later in 2024. But to date, issuers have preferred to take advantage of the current period of market stability rather than risk delaying and facing uncertain conditions in the lead up to major elections.
Indeed, investment grade debt issuers are enjoying the best conditions for raising finance in two years but are not taking any chances. With the window for issuance open again, companies are making the most of the present circumstances.
