At the onset of 2020, finance directors and treasurers of companies across the globe had their financing plans clearly laid out. Rates were low, credit spreads were tight and the markets looked wide open for issuance with little chance of recession forecast ahead.
Some were fortunate enough to come to the market in January and February, after which of course everything changed. Once markets did reopen, as is always the case, quality led the recovery and the same has been true in the primary market, with huge volumes of new bond deals, especially in investment grade, coming to the market in the last six months or so. High yield supply eventually followed, but we have seen investors show clear sectoral preferences as this recessionary crisis has weighed heavier on specific sectors of the economy.
As we move into final quarter of this most extraordinary year, markets are once again wide open and with perhaps six weeks of new issue window left it will be particularly interesting to see which borrowers’ financing plans are incomplete. Along with more frequent issuers, especially the banks and insurers, we would expect more names with less resilient credit stories to try to access the market, as for this latter group the market has only recently opened up. For bond investors, some of these might represent opportunities to add some pro-cyclicality to portfolios, whereas others should come with a strong health warning.
The hunt for yield is back on, and with rates anchored where they are it will be even stronger than we saw in the previous cycle, so we would expect the majority of these deals to find ample demand. However, now more than ever investors should not neglect their credit work as the default rate ratchets higher towards its expected 2021 peak.
Unlike the past six months, where nearly all new deals performed well in the secondary market, from here on in that is far from guaranteed. Expect winners and losers.