Outlook 2024: Mostly steady high-grade supply expected; less M&A forecast; coupons hit highs

By Cristal Cody

Tupelo, Miss., Dec. 29 – Investment-grade bond issuers handled a roller-coaster of events in 2023 that pressured issuance and spreads, while average coupons soared to what typically would be junk paper.

Issuance in 2024 is expected to be range-bound with 2023 volume of approximately $1.2 trillion, though January is anticipated to post heavier-than-average supply, informed sources reported.

Market sources are forecasting around $1.25 trillion to as much as $1.35 trillion of investment-grade bond issuance in 2024.

“We look for IG supply to accelerate modestly in 2024 to $1.33 [trillion] from the expected $1.25 [trillion] for 2023,” BofA Securities Inc. analysts said. “Most of the increase is driven by a sizable $90 [billion] jump in maturing debt next year. Another driver of steady issuance volumes is relatively stable IG market credit conditions, as the expected decline in borrowing costs in 2024 is offset by higher economic growth risks.

“Relative to 2023 we look for higher issuance to fund calls/tenders and capex, and less issuance to fund M&A. Elevated cash levels should also reduce the need to issue next year.”

Supply in 2023 was mostly flat from the $1.22 trillion of bonds brought in 2022, sources reported.

The first month of 2024 is forecast to see about $150 billion of investment-grade paper print, up from around $145 billion priced in January 2023 and matching or exceeding the heavy volume in January 2022, sources said.

December saw strong volume totaling over $20 billion in the front half of the month and continued with a surprise deal in the week ahead of Christmas.

Some deals, including a high-grade corporate $25-par preferred offering, that were first expected in December were pushed to January due to uncertainty surrounding the Federal Reserve’s move at its last policy meeting of the year, a source said.

By early December, “basically everybody’s made up their mind on who’s going to go in January, and January is usually the No. 1 or 2 month, outside of September and maybe May, for issuance,” a syndicate source said. “January is intimidating this year.”

Sector views

A couple of high-grade sectors are expected to see much heavier volume in 2024 with the real estate and technology spaces forecast to post a more than 50% uptick in issuance in 2024 over 2023 supply, according to a market source.

A few sectors are expected to see slightly less supply, including more than a 10% drop in forecasted 2024 volume in the investment-grade health care and consumer and retail spaces.

“It’s going to be a year of struggles next year,” one informed source said. “A very volatile year. I’m not on board with the market thinking the Fed is done with rates. I would not be surprised if there is one more rate hike. We’ve never been here before coming out of a pandemic on the record and too many events going on in the world that could explode and set the market on its head.”

Yuri Seliger, head of BofA Securities’ U.S. investment-grade credit strategy, said in a press conference in December that the big picture outlook for the U.S. economy is fairly benign.

“We don’t think there is a high chance for a deep recession in the U.S. at all,” he said. “Until we have a clearer understanding of how this cycle is going to play out, we think IG spreads will stay somewhat wider.”

If interest rates decline, that will be supportive of banks, which would sort of serve as a stabilizer of spreads, Seliger said.

“We’re not too worried about downgrades to high yield, which would typically be a risk for triple Bs,” he said. “Going into 2024, if somebody wants to take less credit risk, one way to do it is by a combination of Treasuries and triple Bs.”

The outlook for investment-grade corporate credit actually is “more favorable than it has been in a decade,” according to a December report from DoubleLine Global Development Credit.

Part of that is due to the “potential to generate high single-digit returns while running limited downside risk,” the firm said.

After years of low rates, the outlook for investment-grade corporate bonds is compelling with a “lock-in of roughly 6% yields,” according to the report.

In fact, the average coupon for 2023 investment-grade supply was 5.53%, the highest level since 2006 and up from the 4.23% average in 2022, according to a BofA report.

Fitch Ratings said in a December note that North American corporate investment-grade credit profiles will prove resilient in 2024.

“Most Fitch-rated issuers will enter 2024 with leverage below our negative sensitivity, leaving room to navigate an uncertain environment, but idiosyncratic factors, financial strategy shifts or event risk could raise downside risk for some issuers,” Fitch said.

Fitch noted that it published 27 sector outlook reports covering the North American investment-grade corporate universe with the outlook for 74% of the sectors neutral, 19% listed as deteriorating and 7% improving.

Lower 2024 M&A supply

Issuance from funding related to mergers and acquisitions is anticipated to decline $40 billion in 2024 from around a $140 billion annual pace in 2023 and 2022, BofA said.

“That should be mostly driven by the more expensive borrowing costs in the base case scenario of a soft landing, or higher economic uncertainties in the downside recession scenario,” according to a note. “Following the big jump in borrowing costs, not surprisingly, companies are switching rapidly from debt to equity financing of M&A deals.”

North American M&A announcements declined to $139 billion in November from a high $268 billion in October, BofA said.

M&A-related IG issuance totaled $13 billion in November, up from zero in October and $11.5 billion in September.

Some transactions scheduled in early 2024 include Kroger Co., which is expected to be in the primary market in January with a major multiple-tranche deal to fund its $25.4 billion acquisition of Albertsons Cos. Inc., sources said.

Also, HSBC Holdings plc’s sale of its Canada banking business to Royal Bank of Canada for around $10.1 billion is expected in the first quarter of 2024, a source said.

U.S. Realty Income Corp.’s $9 billion acquisition of Spirit Realty Capital Inc. is expected in March.

Some of the major transactions slated to close in 2024 that may tap the high-grade space for debt funding include Exxon Mobil Corp.’s $59.5 billion acquisition of Pioneer Natural Resources, US Bunge Global SA’s $17.8 billion merger of Viterra Ltd., Smurfit Kappa Group plc’s $20.9 billion takeover of US Westrock Co. and AbbVie Inc.’s $7.8 billion acquisition of ImmunoGen Inc.

“2023 was a challenging year for dealmakers,” S&P Global Ratings said in a report. “From elevated interest rates to tighter regulations to geopolitical conflict, M&A activity continued to decline from the highs seen in 2021.”

M&A announcements and closes trended down in 2023 compared to the record year of 2021, Christine Short of Wall Street Horizon said in a report.

Announcements in the fourth quarter hit 100, down from more than 100 last year.

The number of bank mergers also slowed dramatically in the first half of 2023 with about 40 transactions announced, well below the five-year average of about 100 deals over the same time, according to data compiled by KBRA Financial Intelligence.

“Bank M&A has stalled amid higher interest rates, a tougher regulatory environment, and increased uncertainty following the regional bank failures this spring,” KBRA said. “Higher rates have curbed lenders’ profitability, saddling them with unrealized losses in their bond and loan portfolios, which become recognized in a sale. This dynamic has left many banks on the sidelines until the Federal Reserve starts lowering interest rates or bond losses roll off banks’ books.”

Bank supply thins

Bank supply slowed materially in 2023 to $364 billion by December, down from to $478 billion for all of 2022.

“After heavy supply in 2021 and 2022 banks have largely reached their target TLAC levels,” BofA said. “As a result, net US IG index supply, for both US and Yankee banks, has been close to zero over the past 12 months. We look for that to continue in 2024 as well, as the incremental issuance needs for the regional banks should remain relatively modest.”

The regional banking crisis in March sent shockwaves across the globe after three banks were closed and auctioned off.

Bank supply by the fall was pricing with coupons once reserved for the junk space.

The average coupon for 2023 investment-grade supply was 5.53%, the highest level since 2006 and up from the 4.23% average in 2022, according to a BofA report.

JPMorgan Chase & Co.’s $7.25 billion three-part deal of fixed-to-floating rate notes (A1/A-) sold Oct. 16 featured coupons all over 6% and as high as 6.254% on the 11-year and longest-dated tranche. The lowest coupon was the 6.07% four-year note.

Back on July 17, JPMorgan priced a $4.5 billion two-part offering of new and reopened fixed-to-floating rate senior notes totaling $4.5 billion with a coupon of 5.299% on the new tranche due 2029, while the add-on was the 5.35% notes due 2034 first priced on May 24.

Bank coupons were printing in the 5% area also back in JPMorgan’s last deal of 2022 when it sold $3 billion fixed-to-floating rate senior notes due 2025 with a 5.546% coupon on Dec. 12, 2022.

Coupons were lower in December as issuers took advantage of market conditions. In one of the last high-grade offerings of 2023, JPMorgan Chase Bank, NA priced a $3.75 billion two-part offering of exempt senior bank notes on Dec. 5.

The deal included a $1 billion floater due Dec. 8, 2026 that came at par to yield SOFR plus 100 basis points and a $2.75 billion fixed-rate tranche with the same tenor that had a 5.11% coupon and sold at par to yield Treasuries plus 78 bps.

Other bank and financial issuers that brought high-grade deals this year also printed with coupons north of 6%, including Wells Fargo & Co., PNC Financial Services Group Inc., Bank of New York Mellon Corp., Goldman Sachs Group Inc. and US Bancorp.

Some were even higher, including notes with a coupon over 7% from BPCE SA and a split-rated perpetual subordinated note (Baa3/BB+) with an 8.2% coupon from Mitsubishi UFJ Financial Group Inc.

By the end of the year, banks were back in the primary market wrapping up the last of the year’s issuance.

Over the week of Dec. 4, issuers included Toronto-Dominion Bank, Wells Fargo Bank NA and Bank of Montreal.

Rate cuts priced in

Although the Federal Reserve left rates unchanged at its December meeting, rate cuts in 2024 already are being priced in, sources reported.

Michael Gapen, head of U.S. economics at BofA, said in a press conference in December that analysts are “still fairly optimistic on the outlook for the consumer. We think consumer spending slows, but we have consumption growth remaining positive; that’s two-thirds of GDP. It’s the non-consumer segment of the economy we think slows – business spending. Geopolitical uncertainty is making for more caution in the investment environment.”

Gapen said BofA expects a soft landing for the U.S. economy, with positive but below-potential sequential growth for the next six quarters.

“These growth dynamics imply gradual disinflation and a slowdown in employment, which should allow the Fed to start cutting rates by 25 bps per quarter in June,” he said. “We think the Fed is done hiking.”

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.