In addition to tapping the bond market and holding proceeds in cash, companies took other actions, including suspending dividends and ending share-repurchase programs, to conserve cash to get through the crisis.
Global debt capital market activity reached a record $2.3 trillion in the first quarter of 2020, a period that included the fastest sell-off in credit market history. US investment-grade corporate debt issuance surged 35% from the same period a year earlier to $436 billion, according to Refinitiv. Companies rushed to issue bonds to build up their cash reserves in the face of a looming global recession and lower operating income due to the coronavirus pandemic.
Despite a near shutdown of the primary market for high-yield offerings in March, the volume of global high-yield corporate debt rose 11% to $108 billion in the first quarter, compared to the same period a year earlier. High-yield offerings from companies based in the US accounted for 51% of the first quarter’s activity.
Debt issued by corporations in emerging markets rose 24% in the first quarter to $100 billion. Issuance by companies in India, Saudi Arabia and Indonesia had triple-digit percentage gains compared to a year ago.
On Sunday, March 15, days ahead of a regularly scheduled meeting, the Federal Reserve cut interest rates to near zero and announced it would buy hundreds of billions of dollars worth of bonds, including corporate debt, as part of a sweeping economic stimulus program.
“The fastest sell-off in credit market history has been met with the most aggressive policy response, but we still have the deepest recession since World War II ahead of us,” credit market analysts at BNP Paribas said in a report. The bank’s economists expect real GDP in the US to contract by 5.7% this year.
Positive risk sentiment in the credit markets was bolstered by large-scale Fed programs, according to analysts at Pimco. Yield spreads narrowed in investment-grade bond markets and primary market issuance picked up following the Fed’s announcements.
According to Refinitiv, the top five corporate bond issues in the US investment-grade market in the first quarter were: Oracle ($19.9 billion), Carrier Global ($9.25 billion), ExxonMobil ($8.5 billion), Intel ($7.97 billion) and PepsiCo ($6.46 billion). ExxonMobil’s debt offering came less than two weeks after Moody’s Investors Service cut the oil company’s top credit ratings to Aa1 from AAA with a negative outlook, due to lower oil prices and its “sizable negative free cash flow funded through debt in 2020,” as well as uncertainty associated with the pandemic.
In addition to tapping the bond market and holding proceeds in cash, companies took other actions, including suspending dividends and ending share-repurchase programs, to conserve cash to get through the crisis.
S&P Global Ratings said in a March 20 report: “We expect the US trailing 12-month corporate default rate to rise to 10% within the next 12 months, from 3.1% in December 2019, as a global recession is now here amid the coronavirus pandemic.”
In its worst-case scenario, S&P Global said a protracted period of fighting to contain the virus and reduced effectiveness of stimulus measures could lead to a longer recession, pushing the default rate up to about 13%.
