Outlook 2022: IG corporate bond supply drops in 2021; busy January deal pipeline eyed

By Cristal Cody

Tupelo, Miss., Dec. 31 – Investment-grade corporate issuers finished 2021 with lighter volume than priced in the record Covid-19-induced pipeline of 2020 but steady bond supply is anticipated for 2022.

The year saw $1.5 trillion of high-grade issuance, 19% below the record $1.86 trillion of bonds priced in 2020 but still 24% higher than the $1.21 trillion printed in 2019, BofA Securities, Inc. credit strategist Yuri Seliger said in a December report.

Verizon Communications Inc., AerCap Ireland Capital DAC and Amazon.com, Inc. priced the year’s biggest bond deals.

Total 2021 high-grade supply, including sovereign, supranational and agency bonds, came to $1.86 trillion, down nearly 17% from $2.24 trillion of corporate and SSA supply brought in 2020, according to Ronald M. Quigley, head of Fixed Income Syndicate, Primary Sales and FIG/Utilities at Mischler Financial Group, Inc.

“This year was a gangbuster year by any measure,” Quigley said. “The 2020 pandemic year, we saw record-breaking issuance.”

The year closed December with record high-grade supply for the month and a growing anticipation of a busy January 2022 pipeline.

December supply totaled $62.4 billion, the “highest on record excluding government-guaranteed bank issuance in December 2008,” Seliger said.

The previous record for December was in 2014 with $56.47 billion of supply, Quigley said.

Corporate issuers beat syndicate sources expecting $36 billion of issuance in December with volume coming in the front half of the month before supply cooled ahead of the holidays and the Federal Reserve’s last monetary policy report of the year.

Strong January supply

The first week of the New Year is predicted to rack up about $30 billion to $35 billion of volume with the month posting about $130 billion to $135 billion of issuance, according to syndicate sources.

“It’s going to be a very busy January that’s going to spill over into the first quarter,” Quigley said.

In the past three years, January saw investment-grade corporate-only issuance average $133.08 billion with volume including SSA supply averaging $189.74 billion, Quigley said.

January SSA issuance has averaged $56.66 billion across the last three years, he said.

BofA Securities expects “typical” high-grade supply in January of $125 billion to $145 billion, according to a research note.

“The outlook is a balance between supply being pulled forward into January and lower bank issuance needs next year,” Seliger said. “First, the elevated supply volumes in November and the record supply for the month of December likely reflect issuers accelerating issuance plans to lock in lower borrowing costs ahead of the Fed rate hikes that could start as early as March.”

January tends to be the heaviest month for bank supply, on average accounting for 14% of the total annual bank issuance, but may be lighter in 2022, according to Seliger.

High-grade bank supply is projected to decline by $99 billion in 2022 from 2021, which could subtract about $14 billion from the banks’ typical January issuance, Seliger said.

In January 2021, banks including Bank of Montreal, Bank of New York Mellon Corp., Citigroup Inc., Credit Suisse Group AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, Royal Bank of Canada, Toronto-Dominion Bank and UBS AG, London Branch tapped the primary market.

The major banks are scheduled to release their fourth-quarter earnings results in mid-January.

While some lower bank supply is expected in 2022, there may be other types of bank paper priced, including subordinated notes and bail-inable debt, Quigley said.

“Some of the maturity towers for Goldman Sachs are coming due, so they’re going to have to refinance,” he noted.

Annual bond volume

Overall investment-grade corporate bond volume in 2022 is forecast to total $1.3 trillion to $1.4 trillion, about $100 billion below 2021 but $140 billion above 2019’s volume, Seliger said.

Supply is expected to decline for causes including that higher expected interest rates pushed companies to tap the market while lower rates were still available. Also, banks are expected to normalize issuance volume in 2022 as the Federal Reserve tapers quantitative easing, which had prompted elevated supply, according to BofA.

During 2021, bank supply was heavy with deals that included Bank of America Corp.’s $15 billion six-tranche offering on April 16, which ranks as the all-time largest bank deal and priced a day after JPMorgan Chase brought a $13 billion five-tranche offering of notes.

Quigley pegs overall 2022 high-grade corporate bond and preferred volume at the $1.5 trillion area.

“We’ll eclipse this year, probably motivated by the fact that we know rates are going to go up so that spurs activity on behalf of issuers,” he said. “We’ll see more issuance next year.”

Outflows heavy

High-grade funds saw nothing but outflows over the front half of December but were ending the year with a net inflow of $136.92 billion, according to market sources and Refinitiv Lipper U.S. Fund Flows.

U.S. high-grade funds and ETFs reported a $4.6 billion outflow for the week ending Dec. 8, according to a BofA note.

The outflow was the biggest since April 2020 and followed outflows of $1.38 billion and $1.41 billion over the prior two weeks, bringing the cumulative outflow to $7.39 billion.

Strong demand for high-grade credit in the second half of 2021 should continue in 2022 driven by the lack of yield both in the U.S. market and globally.

“Inflation is simply too prevalent across the globe now for central banks to stay pat, and commit to long lasting policies,” according to a BofA report. “Our concern is that elevated rates [volume] could lead to weaker inflows into IG corporate bond funds in 2022.”

2022 concerns

Concerns for 2022 include a more hawkish Federal Reserve and European Central Bank, along with Covid-19 variants and fallout from China’s distressed property space, but those are not expected to impact the high-grade space too much.

“A new variant is always possible, but recall that the emergence of the Delta variant in the summer was not enough to push IG spreads from trading inside a narrow range,” BofA analysts said.

If inflation begins to weigh heavily on demand, credit quality could suffer, according to a S&P report.

“For now, spreads on corporate debt remain historically low, helping borrowers push out maturities, and the North American net outlook bias has narrowed significantly, from the pandemic peak of 42%, to just 5% in November,” S&P said.

“For corporate borrowers in many sectors, ongoing supply constraints and/or labor shortages will likely persist into second half of 2022, hurting profit margins for some,” S&P said.

As much as inflation remains on the minds of investors headed into 2022, a repeat of the 1970s environment is unlikely, Confluence Investment Management analysts Mark Keller, Bill O’Grady and Patrick Fearon-Hernandez said in a note.

Investors had fewer alternatives in the ‘70s – gold futures only started trading in 1974, crude oil began in 1978 and T-bonds came in 1977, while structured products were generally unavailable and commission rates were high, according to the note.

“We don’t expect a recession in 2022,” the Confluence analysts said. “Real GDP growth will range between 3% and 3.5%. Inflation remains elevated, though price pressures will likely subside in H2 2022.”

Unemployment numbers also were on the decline headed into the New Year, with initial claims for the week ended Dec. 4 down 43,000 to 184,000, 36,000 lower than forecast and the lowest weekly decline since 1969, Quigley said.

BNP Paribas Asset Management said in its 2022 investment outlook report that some production constraints will remain well into 2022 but will eventually be resolved.

“While intransigent inflation is likely to lead the U.S. Federal Reserve to raise policy rates several times in 2022, the cycle of rises is likely to be short; euro zone rates are unlikely to rise until 2023,” BNP said.

JPMorgan Chase & Co. said it expects the Federal Reserve to wind up its asset purchases in March and then begin hiking rates in June.

“It will likely hike rates by 25 basis points each quarter until they reach 2.25%-2.5% in mid-2024,” according to a JPMorgan note. “Both the Bank of England and the Bank of Canada are expected to start hiking next year ahead of the Fed, while the European Central Bank has signaled its first rate hike no earlier than 2023.”

Morgan Stanley cautions that, “When it comes to investment-grade corporate credit, we have some aversion to highly rated bonds, including A-rated corporates with high cash balances because there’s risk that M&A activity in this cohort could weigh on valuations.”

High-grade deal volume from the mergers and acquisitions pipeline is expected to stay strong in 2022.

Companies including Oracle Corp., KKR, ConocoPhillips Co., Intuit Inc., U.S. Bancorp, Amazon.com and AT&T Inc. are in the pipeline for potential bond offerings to fund acquisitions announced in 2021, sources report.

By December, the cumulative enterprise value of potential M&A-related bond deals for the high-grade market in 2022 totaled $324 billion, up from $280 billion at the same time a year ago, according to Quigley.

Wider spreads eyed

Investment-grade spreads improved by the end of 2021 after widening in November but are forecast to move out in the second half of 2022.

T-Mobile USA Inc.’s $3 billion three-tranche offering of senior secured notes (Baa3/BBB-BBB-) that priced Dec. 1 tightened 1 bp to 2 bps the week of issuance and came in about 9 bps to 14 bps by mid-month, a source said.

T-Mobile’s 2.4% notes due 2029 were trading 14 bps tighter at 91 bps bid. The notes priced in a $500 million tranche at Treasuries plus 105 bps.

Goldman Sachs Group’s $3.25 billion offering of notes (A3/BBB+/A) that priced at the start of December widened about 2 bps after pricing but firmed about 6 bps to 10 bps by late in the month, according to a market source.

Goldman’s tranche of 1.217% notes due Dec. 6, 2023 softened to 66 bps bid, 64 bps offered soon after issuance and tightened to 59 bps bid by the week of the Fed’s meeting.

Goldman sold $1.75 billion of the notes on Dec. 1 at a spread of Treasuries plus 65 bps and priced another $150 million of the notes a day later on Dec. 2 at a 63.5 bps over Treasuries spread.

In 2022, investment-grade spreads are forecast to trade in an 85 bps to 110 bps range, tighter at first but widening in the second half as the Fed begins rate hikes and dollar hedging costs increase, according to a BofA note.

“We expect bigger, fatter trading ranges for high-grade credit next year, with spreads heading wider in 2H as dollar hedging costs rise,” BofA reported.

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