The world of corporate finance is experiencing a significant surge in demand for bonds,leading many companies to issue their debt instruments ahead of schedule.This trend has created a remarkable environment,as firms scramble to capitalize on favorable borrowing conditions,with projections for corporate debt issuance reaching unprecedented heights.
Recent reports have unveiled that,according to data from LSEG published on December 27,corporate bond and leveraged loan issuance globally is set to exceed $7.93 trillion in 2024,representing an impressive year-on-year increase of over one-third.This surge indicates not only a recovery from pandemic-related economic disruptions but also a strong investor appetite for corporate debt.
Take,for instance,the pharmaceutical giant AbbVie,which raised $15 billion in February through the issuance of investment-grade bonds to fund its acquisitions of ImmunoGen and Cerevel Therapeutics.Other major corporations,including Cisco,Bristol Myers Squibb,and Boeing,have followed suit,taking advantage of the favorable conditions to capitalize on investor enthusiasm.
Analysts have noted that this wave of borrowing has eclipsed the previous peak seen in 2021,driven largely by invigorated investor demand.This fervor for corporate debt comes at a time when the Federal Reserve is expected to lower interest rates,alleviating borrowing costs for companies.Even as the baseline interest rate on U.S.government debt climbs to its highest in decades,corporate borrowing expenses have begun to show signs of decline.
John McAuley,head of North American debt capital markets at Citigroup,articulated this sentiment succinctly,stating,“The market is operating at full throttle,even exceeding expectations.” This robust market activity can be primarily attributed to the low financing costs available to companies.Many firms are choosing to issue debt now,anticipating potential market volatility in the months to come.
As credit spreads — the difference in yield between corporate bonds and government bonds — continue to narrow,some companies are locking in their borrowing needs for the coming year.The optimally favorable market conditions have prompted an eagerness to secure funds ahead of time.Tammy Serbée,co-head of fixed income capital markets at Morgan Stanley,described the initial approach companies took: “The original thought was to mitigate funding risk for the year,but then they realized that the current conditions are very attractive.Why not also front-load financing for 2025?”
Data from Ice BofA highlights this phenomenon,with the average spread on U.S.investment-grade bonds narrowing significantly to just 0.77 percentage points following the dollar-denominated bond issuance.This reduction marks the tightest spread observed since the late 1990s.Despite some fluctuations in the market environment,the investment-grade bond spreads have seen little significant widening,remaining at relatively low levels.Alternatively,the spreads for high-yield bonds have seen a slight expansion since mid-November,albeit still hovering near 17-year lows.
However,even with these dwindling spreads,the overall borrowing costs are still relatively high due to government bond yields.Bank of America reports that the yield on investment-grade corporate bonds stands at 5.4%,a significant leap from just 2.4% three years ago.
This attractiveness of corporate debt,buttressed by higher yields,has stimulated substantial inflows of capital,with figures indicating that investors poured nearly $170 billion into global corporate bond funds in 2024 alone,setting a new record.
Dan Mead,head of investment-grade bond underwriting at Bank of America,remarked,“Aside from the issuance frenzy triggered by the COVID-19 pandemic in 2020,this year marks our busiest period for high-grade dollar lending." He added,“Every month,we set supply expectations,and each month’s actual supply has exceeded our predictions.”
Looking ahead,many bankers are optimistic about continued robust corporate financing demand in 2025,even after the anticipated issuance frenzy of 2024.Companies remain committed to refinancing low-cost debt acquired during the pandemic period.Marc Baigneres,co-head of global investment-grade financing at JPMorgan,is confident that “activity will remain steady” in the coming year.
Nonetheless,Baigneres highlighted the potential for unforeseen changes,pointing out that larger-scale debt financing mergers and acquisitions could arise as companies continue to seek growth avenues.Additionally,some bankers have raised warnings that if credit spreads significantly widen from current levels,the fervor for corporate borrowing might begin to slow down.Maureen O’Connor,global head of investment-grade debt underwriting at Wells Fargo,echoed this concern,stating,“Currently,the market is pricing in almost no downside risk,but with spreads priced to near perfection,we are seeing an uptick in specific risks.”
Given the current dynamics,it will be intriguing to observe how the interplay of investor sentiment,corporate strategies,and external economic factors shapes the landscape of corporate debt issuance in 2025 and beyond.The financial markets appear to be in a critical phase,one where businesses are not only reassessing their funding strategies but also responding to evolving economic realities.