S&P Global Is Worried About Lower Debt Issuance. Why the Market Doesn’t Need To.

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S&P Global has a gloomy outlook for the primary corporate debt market, calling conditions “extraordinarily weak.”

The credit ratings giant cited deteriorating macroeconomic conditions and market volatility for the rapid decline in companies’ issuance of new bonds so far this year. It also pulled its guidance for the year.

That’s bad news for companies like S&P Global, whose business models depend on the volume of new corporate bond issuance. But it isn’t necessarily a major concern in the near term for corporate balance sheets or stock investors.

S&P Global stock (ticker: SPGI) dropped 5% on Wednesday, versus a 0.8% decline for the

S&P 500

index. 

Slowing corporate bond issuance should be expected when financial conditions tighten and markets become more volatile. The volume of initial public offerings—another source of financing for corporations—has similarly slowed markedly from 2021’s torrid pace.

The past two years have featured ultra-low interest rates and central banks hoovering up bonds and other securities. Every competent CFO took the opportunity to refinance their company’s borrowings at fixed rates—pushing out maturities and locking in low borrowing costs for years.

“Our early refinancing of several of our outstanding debt securities during 2021 extended out maturity dates and produced the lowest weighted average interest rate in our company’s history at 2.6%,” said Jeff Stoops, CEO of

SBA Communications

(SBAC), a cell-tower real estate investment trust, in February. “The substantial majority of our interest cost is also locked in at fixed rates.”

“We have reduced indebtedness by over $3.4 billion in fiscal year ’21 and also recently refinanced $1.25 billion of our existing bonds to extend our maturities and lower our interest rates,” said Aaron Alt, CFO of food services company

Sysco

(SYY), also in February.

Kraft Heinz

(KHC) took similar steps. CFO Paulo Basilio said in February: “We have been able to extend the maturity of our debt portfolio and significantly reduce our debt coming due over the next 5 years, while maintaining our average interest rate at very attractive levels.”

Corporate debt outstanding by nonfinancial companies is at an all-time high of nearly $12 trillion today, according to Wells Fargo, nearly triple the total two decades ago.

Now, with interest rates on the rise and the Federal Reserve shrinking its balance sheet, conditions are less favorable for companies looking to issue new debt.

The market has been pricing a greater risk of default into bonds lately, but nowhere near levels that suggest widespread panic. The average spread between the yield on investment-grade corporate bonds and equivalent U.S. Treasuries has widened to about 1.5 percentage points, from below 0.9 point, over the past six months. In March 2020, that spread spiked to above 4 percentage points. 

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For high-yield bonds, the spread over Treasuries has widened to about 5 percentage points recently, up from around 3 points last fall—but well below the 11-point peak spread in March 2020.

Total U.S. corporate bond issuance was $623.4 billion through the end of April, down 21% year over year, according to the Securities Industry and Financial Markets Association, a trade group.

The decline in corporate bond issuance has been particularly strong in the high-yield market. Just $13.2 billion priced from the beginning of April to late May, according to Goldman Sachs data, down 70% year over year. That puts the second quarter on track to be the most muted for high-yield issuance since late 2018—another period of tightening monetary policy and worries about slowing economic growth.

For investors concerned about corporate balance sheets, it’s better to focus on the ability of companies to maintain their existing debts. On a macro level, there isn’t much to be concerned about there for now.

“With around 70% of corporate debt fixed at low rates, we are not overly concerned at this time about the ability of the nonfinancial corporate sector to service its debt, even in the face of higher rates,” wrote Wells Fargo’s chief economist Jay Bryson in a May report.

U.S. companies should have little trouble servicing their debt should net issuance continue at its prepandemic pace and corporate profits hold steady, Bryson found. A deeper-than-expected U.S. recession that causes earnings to fall significantly would add to the debt-servicing burden, but investors would have other problems to contend with then.

New bond issuance and other corporate fundraising will take a breather after two ultra-strong years and until market conditions stabilize. But company balance sheets are ready for the pause. Investors needn’t panic just yet.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com