credit trends: global corporate new bond issuance...

Credit Trends:

Global Corporate New Bond IssuanceSlowed In June 2013 Amid RisingYields

Global Fixed Income Research:

Diane Vazza, Managing Director, New York (1) 212-438-2760; [email protected]

Jacinto D Torres, Senior Director, New York (1) 212-438-3243; [email protected]

Research Contributors:

Aniket Sakhare, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

Debabrata Das, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 9, 2013 1

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Credit Trends:

Global Corporate New Bond Issuance Slowed InJune 2013 Amid Rising Yields

Global corporate new bond issuance declined to $144 billion in June 2013 from a monthly average of $316 billion in

the first five months of the year. June's total is the smallest since December 2011 when only $129 billion in new

corporate bonds globally came to market. Only 44 new speculative-grade bonds (those Standard & Poor's Ratings

Services rates 'BB+' or lower) were issued in June totaling just $19 billion, compared with an average of 108 deals and

$52 billion per month in the first five months of the year. New investment-grade issuance (rated 'BBB-' or higher)

declined to 207 deals totaling $65 billion in June from a monthly average of 336 deals and $169 billion in January to

May of 2013. Of the $144 billion in new bonds in June, Standard & Poor's did not rate $60 billion. During the second

quarter of 2013, about $804 billion in new corporate bonds globally came to market, bringing the total in the first half

of 2013 to $1.7 trillion (see table 1).

The marked decline in new bond issuance and the sharp rise in yields followed widespread speculation related to when

and how the Federal Reserve would wind down its asset purchases. The winding down of asset purchases by the Fed

could be indicative of a reversal in its protracted accommodative policy. The 10-year U.S. Treasury yield rose to 2.49%

at the end of June, from 2.16% at the end of May and 1.68% at the end of April. It has continued to increase in the first

week of July. We observed similar sharp increases in yields throughout every rating category, perhaps marking a

turning point in the global credit markets (see chart 5). This uncertainty put a damper on investor demand, even as

companies continue to find opportunities to raise capital. Convertible bond issuance, for instance, has remained robust

in recent weeks as these types of securities allow companies to issue debt at relatively lower yields while giving

investors the opportunity to benefit from equity price appreciation. Almost $8.3 billion in new convertible (and

exchangeable) bonds came to market in June, accounting for about 6% of total new debt issuance, compared with just

3% in the first five months of 2013, and between 2% and 4% in full years 2009-2012 (see "Convertibles Speed Ahead

As New Bond Activity Stalls," published on RatingsDirect on July 8, 2013).

Table 1

Global Corporate New Bond Issuance

--2011-- --2012-- --2013*--

($ bil.) Financial Nonfinancial All Financial Nonfinancial All Financial Nonfinancial All

Europe total 584 282 866 621 435 1,056 365 236 601

Investment

grade

470 173 643 473 308 781 264 148 413

Speculative

grade

16 47 63 15 57 72 27 52 79

Not rated 98 62 159 133 70 203 73 36 109

U.S. total 247 494 741 368 677 1,045 196 341 538

Investment

grade

187 312 499 261 412 672 154 201 355

Speculative

grade

30 156 186 51 237 287 21 124 145


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Table 1

Global Corporate New Bond Issuance (cont.)

Not rated 30 27 57 56 29 85 22 16 38

Other developed

total

167 126 294 199 151 351 90 81 170

Investment

grade

76 32 108 85 52 137 52 25 77

Speculative

grade

1 9 10 1 18 20 -- 12 12

Not rated 90 85 176 113 81 194 37 44 81

Emerging market

total

259 302 562 327 333 660 185 240 426

Investment

grade

47 44 92 78 68 146 49 27 76

Speculative

grade

12 29 40 13 27 41 8 35 42

Not rated 200 229 430 235 238 473 128 179 307

Grand total 1,257 1,204 2,462 1,515 1,596 3,111 836 899 1,735

Investment

grade

781 561 1,342 897 839 1,736 520 401 921

Speculative

grade

58 240 298 81 339 420 56 223 279

Not rated 418 403 821 538 418 955 261 275 535

*Data as of June 2013. Emerging markets include Emerging Asia, Emerging Europe, Latin America, Middle East, and Africa. Other developed

includes Australia, Japan, Canada, and New Zealand. Source: Standard & Poor's Global Fixed Income Research; Thomson Financial.

Of the $1.7 trillion in new corporate bonds through June 2013, European companies issued $601 billion (35% of the

total), U.S. companies issued $538 billion (31%), emerging market companies issued approximately $426 billion

(24.5%), and companies from the other developed region (Australia, New Zealand, Canada, and Japan) issued the

remaining $170 billion (10%). New speculative-grade bonds issued through June 2013 reached $279 billion (16% of the

total), investment-grade bonds totaled $921 billion (53%), and the remaining $535 billion (31%) were bonds that

Standard & Poor's did not rate.

Financial companies issued $836 billion of the $1.7 trillion in new corporate bonds in 2013, while nonfinancial

companies issued the remaining $899 billion. By region, however, the issuance volumes of financial versus

nonfinancial companies differed significantly. For example, in Europe, financial companies accounted for more than

61% of the new bonds issued through June, while the opposite is true for the U.S., where nonfinancial companies

accounted for 63% of new bonds that came to market so far in 2013. Some of the largest nonfinancial deals that came

to the market include those from Apple Inc., Petrobas, Freeport-McMoRan Copper & Gold Inc., AT&T, Telefonica,

Vodafone, Shandong Mining Machinery Group Co. Ltd., and Volkswagen, while some of the largest financials that

issued new debt in 2013 include those from the European Financial Stability Facility, JPMorgan Chase Bank N.A.,

Morgan Stanley, Bank of America, Goldman Sachs, Citigroup, UniCredit SpA, BNP Paribas, Rabobank, and Societe

Generale.

In the emerging markets, new bond issuance declined to $33 billion in June from $79 billion in May. A sustained

slowdown in issuance could derail what has been a record pace for emerging market bond issuance. New bonds issued


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Credit Trends: Global Corporate New Bond Issuance Slowed In June 2013 Amid Rising Yields

by companies from emerging Asia, which accounts for two-thirds of the total this year, declined to $26 billion in June

from $51 billion in May. By far, Chinese companies remained the most active with more than $21 billion in new bonds

in June, down from $29 billion in May. Companies from Hong Kong issued nearly $1.5 billion in new bonds in June,

from $8.5 billion in May. In Latin America, Brazilian companies issued $2 billion in new bonds in June, from $3.3

billion in May. Meanwhile, Russian companies issued more than $1.5 billion in new bonds in June, from about $1

billion in May.

In the U.S., new bond issuance declined to $45 billion in June, the lowest monthly issuance since December 2011.

Financial companies issued $10.6 billion of the $45 billion new bonds in June, while nonfinancial companies issued

$34.5 billion. Investment-grade bonds comprised $33 billion (or 72%), while speculative-grade issuance accounted for

$7 billion (15%). Standard & Poor's didn't rate the remaining $5.5 billion (12%). By comparison, investment-grade new

issuance averaged $64 billion per month in the first five months of 2013, while speculative-grade new issuance

averaged $28 billion. Through the first half of 2013, new investment-grade bonds issued by U.S. companies totaled

$355 billion, while new speculative-grade bonds totaled $145 billion. New U.S. bond issuance that Standard & Poor's

didn't rate in the first half of 2013 totaled $38 billion. Mirroring the rise in U.S. Treasury yields, corporate bond yields

rose markedly in June. The 10-year yield for U.S. industrial companies that Standard & Poor's rates 'BB+' increased to

5.87% at the end of June from 5.16% at the end of May, and the 10-year yield for 'AA' rated U.S. industrials also

climbed to 3.6% from 3.2% (see chart 5).

Borrowing costs also increased in June for both investment-grade and speculative-grade companies. Option-adjusted

bond spreads for U.S. investment-grade corporates rose to 191 basis points (bps) as of June 28 from 178 bps as of May

31 (see chart 7). The U.S. speculative-grade spread also increased to 521 bps in June from 467 bps in May. Meanwhile,

the cost of protection from default increased in the U.S. The CDX North American Investment-Grade Index increased

to 88 bps in June from 79 bps in May, while the CDX North American High Yield Index increased to 435 bps from 391

bps. In other regions, the iTraxx Europe Index also increased to 120 bps from 103 bps, the CDX Emerging Markets

Index increased to 319 bps from 274 bps, and the iTraxx Asia ex-Japan Index increased to 150 bps from 113 bps.

The following are some of the recent developments related to new issuance activity in June:

• Eight issues in the 'CCC' rating category--seven from the U.S. and one from France--came to market in June,

totaling a combined $3.7 billion (see table 2).

Table 2

New Bond Issuance In The ‘CCC’ Rating Category In June

Issue date

Maturity

date Issuer Country Sector Security description Rating

Coupon

type

Issue

amount

(mil. $)

6/3/2013 6/15/2018 Epicor Software

Corp.

U.S. Industrials 9.000% PIK notes due

2018

CCC+ Fixed rate 392.00

6/10/2013 6/15/2021 Sanchez Energy

Corp.

U.S. Industrials 7.750% Senior

unsecured notes due

2021


6/12/2013 7/1/2021 Quicksilver

Resources Inc.

U.S. Industrials 11.000% Senior notes

due 2021

CCC Fixed rate 308.52

6/12/2013 6/21/2019 Quicksilver

Resources Inc.

U.S. Industrials Senior secured notes

due 2019

CCC+ Floating

rate

194.00


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Table 2

New Bond Issuance In The ‘CCC’ Rating Category In June (cont.)

6/18/2013 3/15/2020 Rite Aid Corp. U.S. Industrials 6.750% Senior

unsecured notes due

2020


6/19/2013 7/15/2021 National Financial

Partners Corp.

U.S. Financial

institutions

9.000% Senior notes

due 2021


6/25/2013 7/15/2021 Transdigm Inc. U.S. Industrials 7.500% Senior

subordinated notes

due 2021


6/26/2013 7/1/2018 Alcatel Lucent SA France Industrials 4.250% Convertible

bonds due 2018


Source: Standard & Poor's Global Fixed Income Research; Thomson Financial.

• Seven issues rated 'B-'--three from the U.S., and one each from the U.K, Canada, Luxembourg, and Ukraine--came

to market in June, totaling $1.5 billion (see table 3).

Table 3

New Bond Issuance Rated ‘B-’ In June

Issue date

Maturity


Coupon

type

Issue

amount

(mil. $)

6/6/2013 6/15/2021 Approach

Resources Inc.

U.S. Industrials 7.000% Senior secured

notes due 2021

B- Fixed rate 250.00

6/6/2013 6/15/2020 Bakkavor Finance 2

PLC

U.K. Financial

institutions

8.750% Guaranteed

senior secured notes

due 2020


6/7/2013 6/1/2020 Jack Cooper

Holdings Corp.

U.S. Industrials 9.250% Senior secured

notes due 2020


6/11/2013 10/1/2020 HudBay Minerals

Inc.

Canada Industrials 9.500% Senior

unsecured notes due

2020


6/12/2013 6/15/2021 Emerald

Expositions

Holding

U.S. Financial

institutions

9.000% Senior notes

due 2021


6/14/2013 6/15/2023 Altice Finco SA Luxembourg Industrials 9.000% Guaranteed

bonds due 2023


6/27/2013 3/26/2018 Ukrlandfarming

PLC

Ukraine Industrials 10.875% Fixed/straight

bonds due 2018

B- Fixed rate 72.00


• The largest issuer of new debt in June was the U.S.-based Chevron Corp., which issued about $6 billion in June (see

table 4). Standard & Poor's assigned its 'AA' rating to the four securities that Chevron Corp. issued in June.

Table 4

Chevron Corp. New Bond Issuance In June

Issue date

Maturity


Coupon

type

Issue amount

(mil.$)

6/17/2013 6/24/2023 Chevron

Corp.

U.S. Industrials 3.191% Global notes

due 2023

AA Fixed rate 2,250.00

6/17/2013 6/24/2016 Chevron

Corp.


due 2016

AA Fixed rate 750.00

6/17/2013 6/24/2020 Chevron

Corp.


due 2020



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Table 4

Chevron Corp. New Bond Issuance In June (cont.)

6/17/2013 6/24/2018 Chevron

Corp.


due 2018



• China-based GF Securities Co. Ltd. was the second-largest issuer of new debt in June, with about $5.9 billion (see

table 5). Standard & Poor's did not rate any of the securities that GF Securities Co. Ltd. issued in June.

Table 5

GF Securities Co. Ltd. New Bond Issuance In June

Issue date

Maturity


Coupon

type

Issue amount

(mil. $)

6/17/2013 6/17/2018 GF Securities

Co. Ltd.

China Financial

institutions

4.750% Fixed/straight

bond due 2018

N.R. Fixed rate 816.36

6/17/2013 6/17/2023 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2023


6/19/2013 6/19/2018 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2018


6/19/2013 6/19/2023 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2023


6/19/2013 6/19/2016 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2018


6/17/2013 6/17/2018 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2018


6/17/2013 6/17/2023 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2023


6/17/2013 6/17/2018 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2018


6/17/2013 6/17/2018 GF Securities

Co. Ltd.

China Financial

institutions


bond due 2018


N.R.--Not rated. Source: Standard & Poor's Global Fixed Income Research; Thomson Financial.

• Investment-grade new issuance comprised 45% of the $144 billion in new corporate debt that came to market

globally in June, while speculative-grade new issuance accounted for 13%. Issuance that Standard & Poor's did not

rate comprised the remaining 42%.

• Bank of America Merrill Lynch reported that 66% of the new speculative-grade bonds that came to market in

first-quarter 2013 were used to refinance debt. This measure was up from 54% in 2012, 53% in 2011, and 61% in

2010. Bank of America Merrill Lynch also reported that 14% of the new speculative-grade bonds issued in the first

quarter were issued for general corporate purposes, 14% for acquisitions or leveraged buyouts, 3% for capital

expenditures, and about 3% for equity monetization.

• The U.S. five-year inflation-adjusted Treasury yield rose to -0.35% in June, from -0.82% in May. The U.S. 10-year

inflation-adjusted Treasury yield turned positive in June for the first time since January 2012. It rose to 0.53%, from

-0.05% in May. Speculation that the Fed is preparing to wind down its asset purchases pushed Treasury yields up, a

change from the long period of general decline and accommodative Fed policy of recent years (see chart 6).


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Chart 1


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Chart 2


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Chart 3


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Chart 4


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Chart 5


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Chart 6


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Chart 7


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Chart 8


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