The world of corporate finance is experiencing a significant surge in demand for bonds, leading many companies to issue their debt instruments ahead of scheduleThis 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-thirdThis 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 demandThis fervor for corporate debt comes at a time when the Federal Reserve is expected to lower interest rates, alleviating borrowing costs for companiesEven as the baseline interest rate on U.Sgovernment 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
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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 yearThe optimally favorable market conditions have prompted an eagerness to secure funds ahead of timeTammy 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 attractiveWhy not also front-load financing for 2025?”
Data from Ice BofA highlights this phenomenon, with the average spread on U.Sinvestment-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 1990sDespite some fluctuations in the market environment, the investment-grade bond spreads have seen little significant widening, remaining at relatively low levelsAlternatively, 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 yieldsBank 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 periodMarc 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