In 2022, global debt capital markets pivoted from the peak activity levels seen in 2021 and 2020. Although 2022 began with a strong start, rapid interest rate hikes in the United States, European Union and other countries, coupled with significant increases in inflation globally, geopolitical pressures, ongoing supply chain disruptions and a worsening economic environment and outlook, significantly impacted the debt capital markets as the year went on.
According to data from Refinitiv, global debt issuances of $6.7 trillion during the first nine months of 2022 were down 17 per cent compared to the first nine months of 2021, and the number of new offerings was down 11 per cent over the same period. Financials, governments and agencies increased their share of the market during the first nine months of 2022, comprising 79 per cent. Excluding financials, governments and agencies, global debt issuances fell 35 per cent during the first nine months of 2022 compared to the first nine months of 2021. Moreover, debt issuances trended downward throughout the year, with third quarter proceeds falling below $2 trillion for the first time since the end of 2019 and representing a 23 per cent decrease compared to second quarter proceeds.
Global investment-grade corporate debt issuances of $3.3 trillion were down 9 per cent during the first nine months of 2022 compared to the first nine months of 2021. By contrast, high-yield debt issuances of $112 billion decreased 80 per cent during the first nine months of 2022 compared to the first nine months of 2021, the lowest figure since the financial crisis. Notably, only four markets – the United States, the United Kingdom, the Netherlands and Australia – accounted for nearly three quarters of all high-yield debt issuances in 2022.
Emerging markets debt issuances totalled only $167 billion in the first nine months of 2022, representing a decrease of 48 per cent compared to the same period of 2021. By contrast, local currency debt in Asia of $42.6 trillion increased 10 per cent during the first nine months of 2022 compared to the first nine months of 2021, reaching the highest level since at least 1980, when records were first kept.
Issuances of certain special debt instruments also declined significantly during 2022, with convertible offerings decreasing 78 per cent during the first half of 2022 compared to the same period of 2021. Hybrid bond issuances also dropped significantly, with new hybrid bond issuances in Europe of approximately €10 billion through the end of November 2022, compared to €30 billion during full year 2021.
Green, social, sustainability and sustainability-linked bonds issued by corporations and governments totalled $635.4 billion as of 5 December 2022, compared to $909.9 billion for full year 2021.
Following a relatively smooth 2021, in which market volatility significantly subsided and economies globally experienced various stages of reopening, 2022 was characterised by significant increases in inflation, rapid interest rate hikes in the United States, European Union and other countries, geopolitical challenges, including the war in Ukraine, supply chain disruptions and a worsening macro-economic environment and outlook. Yields increased significantly and rapidly, dampening debt capital markets activity across the globe.
Rapid increases in inflation and interest rates adversely affected borrowing
Interest rates across the globe reached historic lows during 2020 and remained low throughout 2021, leading to continued low borrowing costs and record levels of debt issuances. For instance, in the United States, the federal funds target rate remained at 0.25 per cent throughout 2021. However, in March 2022, the Federal Reserve began to gradually tighten monetary policy with a 0.25 per cent increase. Beginning in the summer of 2022, the Federal Reserve began what has become the swiftest tightening of US monetary policy in the last few decades, prompted by the largest increase in inflation rates in 40 years. As of 14 December 2022, the US federal funds target rate had reached 4.25–4.5 per cent, the highest level in 15 years, and is expected to increase further in 2023, although at a slower rate and to a lesser degree than in 2022.
Regulators in other countries also raised interest rates significantly throughout the year. For example, the European Central Bank increased its policy rate three times in 2022 – by 0.50 per cent in July, and 0.75 per cent in each of September and October, bringing the rate to 1.5 per cent as of 14 December 2022, a rate not seen since the financial crisis – and has confirmed that it is not yet done increasing its policy rate. In the UK, the base rate was 0.10 per cent from March 2020 through December 2021 and has increased incrementally to 3.5 per cent as of 15 December 2022, with further increases expected.
Rating agencies, as well as investment banks, have generally increased their default forecasts for corporate issuers. According to Moody’s, the share of defaulting companies in the US could increase more than threefold in the next year. Moody’s ‘moderately pessimistic’ forecast is that US corporate default rates could reach 7.8 per cent by August 2023, as compared to a long-term average of 3.7 per cent and a current trailing 12-month default rate of less than 2 per cent, whereas S&P forecasts a worst-case default rate of 6 per cent for US speculative-grade issuers. In the Europe, Middle East and Africa region, Moody’s projects that default rates could reach 6.5 per cent compared to 2 per cent currently, and S&P similarly forecasts a doubling or trebling of default rates in Europe. These increases in expected default rates come as high-yield debt issuances have dropped significantly year-over-year. However, some analysts believe that defaults will not reach the levels seen during the financial crisis given that, as a result of the easy access to historically low interest rate debt during 2020 and 2021, many companies continue to have relatively strong cash balances.
The global debt markets continued to transition away from the London Interbank Offered Rate (LIBOR) to the alternative interest rate benchmarks, including risk-free interest rates. The ICE Benchmark Administration, the administrator of LIBOR, ceased publication of all euro and Swiss franc LIBOR settings on 31 December 2021, along with certain Japanese yen, British pound sterling and US dollar LIBOR settings, and will cease publication of all remaining US dollar LIBOR settings after 30 June 2023. Six sterling and yen LIBOR settings continued for the duration of 2022 on a synthetic basis. In September 2022, the UK Financial Conduct Authority announced its decision to cease the publication of one- and six-month synthetic sterling LIBOR after March 2023; a decision is still pending on the continued publication of three-month synthetic sterling LIBOR. In the United States, in July 2022, the Federal Reserve issued a notice of proposed rulemaking implementing the Adjustable Interest Rate (LIBOR) Act, which would replace references to US dollar LIBOR in certain contracts with the applicable Federal Reserve-selected replacement rate after 30 June 2023.
For US dollar issuances, issuers are transitioning to use of the Secured Overnight Financing Rate (SOFR), which is based on the overnight repurchase markets. In July 2021, the US Alternative Reference Rates Committee formally recommended CME Group’s forward-looking SOFR term rates. For other currencies, the alternative reference rates include the Sterling Overnight Index Average (SONIA), the Euro Short-Term Rate (ESTR), the Swiss Average Rate Overnight (SARON) and the Tokyo Overnight Average Rate (TONAR). These rates are generally based on overnight borrowing rates (in the case of SONIA and TONAR), daily, verifiable money market transactions (in the case of ESTR) and secured transactions in the Swiss money market (in the case of SARON).
Looking ahead to 2023
Looking ahead to 2023, there are some signs that inflation could be peaking, which could bring some stability to the global debt capital markets. However, high labour costs, ongoing supply chain disruptions and energy transition could keep core inflation rates high.
In the United States, comments from officials of the Federal Reserve signal that it plans to continue rate increases in early 2023, albeit more slowly than in 2022, and analysts expect that the Federal Reserve will end its interest rate increases in early-to-mid 2023, which would reduce interest rate volatility. However, the yield curve is expected to continue to remain deeply inverted as monetary policy remains tight. The market appears to expect a peak US federal funds rate of approximately five per cent, followed by a decline in late 2023 (Bloomberg), although the Federal Reserve has indicated that they plan to hold rates high through 2023, with no reductions until 2024; it remains to be seen how this will develop, which will likely impact the debt capital markets in 2023.
The International Monetary Fund, World Bank and others have raised concerns about a worsening global outlook, and debt capital markets could remain challenged in the near term as economic headwinds and market volatility keep issuers away from the markets. Total debt issuance activity is not expected to reach pre-pandemic average levels due to continued high interest rates. Some analysts expect an increase in regional bank issuances, which will offset a decline in big bank issuances. Debt issuance to finance mergers and acquisitions activity is expected to remain on the lower side, while refinancings, redemptions and tender offers may be higher in 2023.
A number of macro-economic and other factors could significantly impact how debt issuance activity develops in 2023, including, among other things, a resurgence in inflation due to, among other things, a more-rapid-than-expected reopening of China’s economy or a weaker dollar.