U.S. Corporate Credit Issuance Breaks Records

U.S. Corporate Credit Issuance Breaks Records

Issuance of investment-grade bonds by U.S. companies rose above $191 billion in January.

This was the highest recorded level of activity in January. Including the high-yield and convertible bonds, the issuance in the month crossed $223 billion. Most of the new issuances are related to refinancing.

New records expected in 2024

BofA Global estimates the issuance could be between $160 billion and $170 billion in February. The U.S. corporate bond market is positioned to establish new issuance records in 2024, and we are expecting to see nearly $1.3 trillion of bond issuance in the year. This is attributed to borrowers leveraging lower financing costs than the preceding year, while investors are increasingly attracted to the asset class due to the anticipated economic “soft landing.”

soft landing

The economic indicators are moving in the right direction for the Federal Reserve to start cutting interest rates in 2024. The Bureau of Economic Analysis (BEA) reported robust U.S. economic data, with the fourth quarter GDP exceeding expectations at an annualized rate of 3.3% quarter-over-quarter, compared to the nearly 2% consensus. This substantial growth was credited to increased government expenditure and business investment. Despite a slight slowdown, consumption grew at a solid rate of 2.8%. Both residential and nonresidential fixed investments saw growth. The PCE inflation rate remained steady at 2.6% annually. The growth outlook remains strong due to healthy consumer finances and steady business investment, which should  keep corporate defaults low. Although the Fed hasn’t clearly stated when it will start cutting rates, positive economic indicator changes keep investors hopeful.

Notably, not all may necessarily be as rosy. Due to persistent labour shortages and renewed supply chain disruptions resulting from conflicts in the Middle East and attacks on shipping routes in the Red Sea, inflation may stay higher than the Federal Reserve desires. This challenges policymakers, potentially disappointing market participants anticipating earlier cuts to the federal funds rate. S&P suggests that a recession cannot be ruled out.

The economic indicators

Global Corporate Credit Outlook For 2024: Stability Amid Economic Challenges and Regional Variances

According to Fitch, this year’s global corporate credit outlook is generally expected to be stable and improve despite the anticipation of significantly lower economic growth. The expectation is for default rates among lower-quality, speculative- grade issuers to increase due to worsening economic conditions and the burden of high- interest rates.

global corporate credit

In terms of leverage, the aggregate EBITDA leverage for the global portfolio is projected to be slightly lower at 2.7x in 2024 compared with 2.8x in 2023. Leverage is expected to decline in North America and APAC, led by specific sectors, while a slight year-over-year increase in leverage is expected for EMEA and LATAM, led by other sectors.

Slightly higher aggregate debt for the global portfolio in 2024 is expected to be offset by improved top-line performance, modestly higher profitability due to disinflation, and revenue and cash flow growth. Revenue growth is projected to increase 1.8% in 2024, after declining 1.7% in 2023. The recovery is expected to be strongest in APAC, despite ongoing struggles in the property sector, and to lag in EMEA due to stagnant economic activity.

global corporate credit

Credit trends for high-yield and investment-grade issuers are expected to follow similar trajectories for revenue, margins, and leverage in 2024. However, high-yield issuers are expected to continue to be more adversely affected by high interest rates.

Houthi rebels, operating from Yemen, are imposing a blockade on the Red Sea shipping route, responsible for about 10% of global maritime trade. This action is exacerbating tensions in the Middle East and causing a constrained shipping market with higher freight rates. Nevertheless, these costs are not expected to reach the peaks observed during the pandemic, when consumers were willing to pay extra for goods. Currently, spending on goods is more balanced with spending on services.

There’s a significant risk of a severe energy supply disruption if Iran decides to use the energy market as a weapon against the West by limiting passage through the Strait of Hormuz. Even without a prolonged energy or food supply disruption, the resulting higher costs from disrupted supply chains could make it more difficult for central banks to manage inflation. This might necessitate a reevaluation of the expected pace of interest rate cuts by market participants.

To sum up, the corporate credit outlook for 2024 is influenced by various factors, including ongoing inflationary trends, potential geopolitical disturbances, and a challenging economic climate. The worldwide corporate credit forecast seems to be stable or improving, but there are emerging worries about increasing default rates and the effect of inflation on borrowing costs. Investment-grade corporates show resilience with positive returns and continuous  fund inflows, while the high-yield sector is more susceptible to interest rate changes.

Asset-Backed Lending

Asset-backed lending is where a loan is primarily secured by the cash flows generated by a group of assets owned by a special-purpose borrower. If needed, the loan is further backed by the liquidation value of these assets. This is different from corporate credit, where repayment depends on the general creditworthiness of the borrowing entity. ABL covers various credit types, including mortgages, consumer credit, receivables, aircraft lending, and inventory finance. Because of its broad scope, the ABL market is significantly larger than the corporate credit market.

According to KKR, the market capitalization of the private ABL industry was approximately $5.2 trillion, and it’s projected to escalate to $7.7 trillion by 2027. Several factors influence this growth trajectory:

Inflation: The recent global inflation surge will amplify the demand for private ABL. Traditional lenders retreat due to escalating interest rates, creating a market void that private ABL can address. Market volatility also triggers an increased demand for private ABL.

Diversification: The ABL asset class is diverse, encompassing various assets from consumer loans to mortgages to music royalty contracts. This broad spectrum of assets enhances its appeal as an investment option.

Diversification

Shift in Credit Dynamics

The lending market is thriving. The credit dynamics have shifted recently, marking the end of the prolonged period of low rates. Borrowers had the advantage during the  COVID-19 pandemic due to the zero-interest-rate policy (ZIRP), but the tide has turned with one of the steepest U.S. Federal Reserve tightening paths in history, putting lenders in a position of strength—a position that might last. Higher base rates and broader spreads have made the total yields even more appealing for those considering credit allocations. Lenders now have the upper hand to negotiate favourable pricing with vital assets and structural safeguards. This investment climate benefits disciplined credit investors who are prepared to invest capital.

Other Key Articles: Real Private Residential Fixed Investment

Real Private Residential Fixed Investment

ABL Trends and Opportunities for 2024

The ABL market has seen significant growth and innovation in recent times, driven by various factors such as:

Tighter bank lending standards: The pandemic-induced economic downturn has made banks more cautious and selective in lending to businesses, especially small and medium-sized enterprises (SMEs). ABL provides an alternative source of financing for businesses that may not qualify for bank loans or lines of credit.

Increased ABL usage among middle market companies: ABL has historically been used by larger companies, but smaller firms with revenues under $100 million use these facilities more frequently. ABL can help these companies leverage their assets, diversify their funding sources, and improve their liquidity.

More flexibility in eligible assets and collateral: Beyond traditional assets like accounts receivable and inventory, some ABL lenders now accept assets like real estate, brands, intellectual property, and investments as collateral. This expands the options and opportunities for businesses to monetize their assets and access funds.

Rise of ABL-related financing options: Variations of ABL have emerged, such as purchase order financing, which advances money against outstanding purchase orders at very high advance rates. These options can help businesses bridge the gap between production and payment or finance large orders that exceed their working capital capacity.

Investment Outlook

The outlook for asset-based lending in 2024 appears to be a tale of contrasting fortunes shaped by diverse factors, including sector dynamics, geographical considerations, and borrower profiles. With a focus on developed markets, there is optimism in the U.S. market, particularly in leasing and housing sectors. However, caution is advised in the U.K. due to expected challenges like higher interest rates, inflation, and the ongoing implications of Brexit. In this intricate landscape, an astute investor must navigate carefully, focusing on niche asset classes and regulatory influences.

About Avon River Ventures

Avon River Ventures LLC is an Independent Venture Funding Group and an LP-backed direct Lender that offers $1,000,000 to $50,000,000 in Non-Dilutive Funding to Lower and middle-market companies worldwide. The Private Equity Division is managed under Avon River Ventures LLC and its SPV Series LLCs.  Pen  Hen  Group  LLC operates the Consulting Arm of Avon River Ventures LLC. If you have any questions, please email connect@avonriverventures.com.

Structured Financing Products:

Revenue-Based Financing | Intellectual Property Backed Funding (IP Loans, Patent Loans)| Securities Backed Lending | Private Equity

Strategic Consultation:

Sell Patents | Intellectual Property (IP) Valuation

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