Much has been written about the slowdown of new equity issuance, which is arguably of little surprise given the bumper performance seen in 2021 and the fact that rising interest rates and broader economic uncertainty paint a bleak picture, especially for the more speculative issuances. However, debt markets have come into focus of late too, with concerns being raised as to how a slowdown is being felt in this asset class too. At Avenir Registrars, we support a range of securities issuances, including both debt and equity, so felt our take on the current situation could offer some critical insight when it comes to just how this market is faring with the current headwinds – and how at an anecdotal level we are seeing appetites start to change.
1. Quality issuance is still getting away
Much like the waning appetite for speculative equity issuance, it’s the same story in debt markets. However, investment grade debt and those issuers who are supported by a loyal base of lenders are finding that there is still a reasonably healthy market for appropriately priced paper. So despite underlying conditions, investors are willing and able to assess the relative risk and decide on an appropriate premium, it’s just the opportunity cost has risen significantly from the free or even negative interest rate situation of previous years. To offer some perspective here, PwC’s quarterly debt watch report showed Investment Grade corporate debt issuance down by 25% between Q2 2021 and Q2 2022, whereas high yield debt issuance slumped by almost 80%.
2. Duration to maturity is important
Perhaps this is no great surprise at all, but the duration of any debt issued is playing a pivotal role in the success of any offer, whilst also ensuring issuers don’t end up overpaying for the privilege. With expectations remaining that further monetary policy tightening is still to come, investors rightly expect any paper to reflect this trajectory. But given the underlying uncertainty when it comes to the macroeconomic outlook, issuers and their advisers are equally posed with a dilemma. As Bloomberg reported in early September, Asian companies in particular were favouring short term loans sometimes with maturities of just a few months, as the use of such facilities rose by as much as 30%-40%. https://www.bloomberg.com/news/articles/2022-09-06/worst-bond-market-ever-pushes-asian-firms-into-short-term-loans
At Avenir we have noticed a clear trend for average maturities on new issuances to be falling. It’s also worth bearing in mind that debt issuance can readily be structured in such a way to facilitate redemptions in the event that underlying market conditions end up presenting a more favourable backdrop before maturity. Because we use the same methodology for our debt issuance as we do with equities, this enables issuers to keep costs low when they write new paper and critically this gives issuers some valuable flexibility when it comes to addressing their medium term financing needs.
3. Innovative structures
We’re also seeing a return of the floating rate note, or FRN, as a way of addressing the needs of both the issuer and the investor. There have been some complications here given the withdrawal of the old LIBOR benchmark, as its replacement – the SONIA rate – appears to have had a less than smooth start when it comes to gaining traction in debt markets. The adage that necessity is the mother of invention seems applicable here and as demand for FRN’s grows, it seems inevitable that the market will continue to adapt to the use either of SONIA, or another proxy rate that delivers the flexibility both issuers and investors are keen to embrace.
Structures such as convertible loan notes can also offer issuers some extra appeal in rising interest rate environments, which will typically erode the value of debt whilst bolstering equity prices. With such levels of uncertainty prevailing when it comes to the macroeconomic outlook – few are willing to predict how high inflation will go or indeed how aggressively central banks will respond – CLNs again offer a realistic alternative that may allow issuers to consider longer durations to maturity should that fit better with the overall business structure.
At Avenir we have the flexibility to work with issuers and their professional advisers to accommodate securities issuances on terms that meet your needs, delivered in a streamlines manner and in a cost-conscious way that will support you throughout the entire life cycle of the security.
This article originally appeared in the October 2022 version of AIM Journal. You can download a printable version here.