When companies refinance debt, they tend to extend the maturities as well. Through October 4th, there has been more than $1.2 trillion of corporate bonds issued year-to-date, which appears to be ahead of the pace seen in 2019, prior to the pandemic.
Source: Wells Fargo.
In addition to refinancing existing debt, companies come to the debt markets with new bond issuance for a variety of other reasons. One of the largest uses of proceeds is for general corporate purposes, usually to shore up the balance sheet and provide liquidity. A second option is to refinance existing debt by calling or tendering for higher coupon debt or near-term maturities. Companies can then take advantage of the current low interest rate environment by issuing securities with lower coupons and/or extending maturity structures. Other reasons for companies to issue bonds may include funding mergers and acquisitions, capital expenditures, dividends or share repurchase programs.
One trend that is becoming more prevalent in the corporate world is for companies to focus on environmental, social and governance risks, known as ESG. There are several third-party services that assist investors in identifying companies that are ESG industry leaders. These companies may then issue bonds where the use of proceeds is dedicated to fund green, social or sustainable projects.
Source: Wells Fargo.
As seen in the previous chart, ESG issuance has been growing significantly over the past two years. There are several types of bonds that fit into this category, including green bonds which focus on projects that are environmentally significant (such as climate change) or include renewable energy sources, such as solar panels. Social bonds address social projects such as affordable housing, education, and food, whereas sustainable bonds are simply a mix of bonds with green & social characteristics. Lastly, sustainability-linked bonds are issued for general corporate purposes while having the coupon adjusted higher or lower depending on the achievement of defined sustainability targets.
Source: BBG BI ESG.
There has been a significant amount of new issuance over the past few years due to low interest rates and compressed credit spreads. While 2021 issuance is down around 25% from the record levels experienced in 2020, it is still up over 26% versus 2019. We believe the pace of issuance will remain elevated for the remainder of this year as companies anticipate the Fed’s plan to reduce its bond buying program and possibly raise interest rates in late 2022 or early 2023.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Vice President, Portfolio Manager
Boyd Watterson Asset Management, LLC