IGM Global Credit Snapshot – September 2022

• In Europe SSAs drove a disproportionate 51.2% of overall supply as extreme volatility and negative sentiment crimped activity across the other asset classes, followed by IG Corps (17.6%), Covered (15.3%), FIG (15.2%) and a small contribution from HY (0.7%). EUR supply rose by 69% m-o-m in September although it was more than 15% below the corresponding month of 2021 as extreme volatility constrained fundraising.
• The APAC USD primary market struggled to maintain momentum for much of September but USD25.345bn did manage to get over the line helped by a USD15.1bn (or close to 60% of the overall total) contribution from Japanese borrowers who returned to the market in force.
• US IG Issuance volume for the month of September was USD110.5bn and fell short of respondents' estimates, which had averaged out at USD143bn. Ex-SSA, September's issuance was USD80.45bn, above only June's USD70.85bn in ex-SSA monthly totals for 2022.

** Overall EUR supply rose by 69% m-o-m in September although was more than 15% below the corresponding month of 2021 as extreme volatility constrained fundraising. Activity was concentrated in the early and middle part of the month as issuers took advantage of what turned out to be transient stability in global markets. SSAs drove a disproportionate 51.2% of overall supply as extreme volatility and negative sentiment crimped activity across the other asset classes, followed by IG Corps (17.6%), Covered (15.3%), FIG (15.2%) and a small contribution from HY (0.7%). Yields rose almost continuously during the month, and at alarming rate, in response to persistently hawkish central bank rhetoric and actions, reminding markets that a policy pivot remains a way off. Aggressive moves in rates took 2yr and 10yr German yields as much as 82bps and 81bps higher respectively. In riskier jurisdictions, the 10yr Italy yield rose by up to 103bps, also reflecting increased political uncertainty amid the installation of a right-wing coalition government, threatening increased friction with the EU. Those moves all, however, paled in comparison with the up to 179bps jump in the 10yr gilt yield as markets took the view that a mini budget announced by UK Chancellor Kwarteng amounted to a reckless gamble, triggering a meltdown in gilts and forcing the BoE to step in to preserve UK financial stability.

** FIG (ex-covered): September was a game of two halves as issuers pushed on with funding plans in the first half of the month before the final two weeks of the months delivered just 8% of September's EUR21.262bn supply. Despite the challenging risk tone, historically elevated coupon levels (notably on some of the month's peripheral sales) helped to draw investor demand, in turn producing an overall average cover ratio of 1.91x, that was only a shade below the 1.99x ytd average. Funding came at a price though with the average NIC of 24.7bps above the ytd average of 20.3bps. One issuer formally stood down plans to conduct a EUR sale although it is likely that many more were deterred from actioning plans is what is usually a much busier month and produced a much bigger EUR34.47bn in Sep 2021. Looking ahead and the approach of earnings season has the potential to crimp activity where European banks begin reporting on 19th Oct while US banks report from 14th Oct.

** IG Corporates (ex-HY): It was the slowest September for the IG corporate bond market in seven years. Ethical debt helped underpin volumes, representing almost 46% of total supply, the bulk of which came in green format. The month was also notable for delivering the first corporate hybrid supply in five months. Providing some encouragement, the average NIC fell m-o-m while cover ratios rose although that was largely a function of more receptive conditions seen during the earlier part of the month. September is usually an active month for corporates as they seek to exploit a deeper pool of demand following the summer lull and hit the market before earnings. However, volatility thwarted plans to the extent that Sep supply in 2022 was 43% below that seen in Sep 2021.

** Covered: In typical September fashion, it was a busy month for the covered market and total issuance came to EUR21.275bn from 29 trades, a ca. 37% uptick in supply from August's print. Such has been the pace of issuance this year that this sum represents just the fourth busiest month so far this year. Conditions remained conducive overall during the month, where average NICs, average cover ratios and average spread compressions were broadly level month-on-month.

** SSA: A number of busy weeks drove supply in September and despite a slowdown towards the latter week the SSA sector recorded a monthly EUR haul of EUR71.25bn. That tally was in fact the highest volume September ever according to IGM data. The driving force behind the record September was a combination of sovereign issuers, from across the rating spectrum (with a combined EUR28.1bn of issuance) and, of course, the now omnipresent European Union (NGEU EUR12bn dual tranche). With market volatility spiking throughout the month NICs showed a much more distinct split between deals from high frequency/high rated issuers and less frequent/lower rated names than in the past. Issuers such as KfW, EIB, BNG, German regional players and (non-EM) sovereigns priced deals with NICs between zero to low single digits, whilst Italian and French agency issuers all priced with NICs in double digits (and as high as 28bp for AMCO S.p.A).

** High Yield: The traditional post-summer uptick in activity failed to materialise in the EUR HY-rated corporate market as it recorded the slowest September since 2015 when the Greek government debt crisis was rattling the markets. This time soaring inflation, climbing rates and fear of recession kept a lid on activity with just EUR1bn of HY-rated corporate bonds printed in the month, down over EUR6bn from 12 months ago. On the bright side, Verisure rode out the extreme volatility seen in the last week of the month to print the largest HY note, EUR500m, since 1 June but on the downside the 9.25% coupon represented a major step up from the 3.25% the issuer achieved early last year. Also, with the market creaking, both Inetum and House of HR failed to complete planned bond issues as part of bond and loan financings in September.

The APAC USD primary market struggled to maintain momentum for much of September, consistent with prolonged bouts of acute cross asset volatility on the back of fears that aggressive monetary policy to control robust inflation will drag the global economy into recession.

At first glance the USD25.345bn that managed to get over the line in September looks like a decent outcome under such challenging circumstances, marking the highest volume month since April. However, that doesn't really tell the whole story as USD15.1bn or close to 60% of that total was contributed by Japanese borrowers which returned to the market in force.

Indeed, it also more accurately reflects the paltry issuance volumes that we've become accustomed to seeing in recent months, where the USD8.989bn that priced in August was the second lowest volume month for APAC USD issuance on record. That as the month of September is typically one of the busiest in the primary market, as highlighted by the significantly higher USD57.668bn and USD64.339bn that materialized in the same month in 2021 and 2020.

Stripping out the notable contribution from Japanese borrowers, saw regional investment grade supply total just USD7.92bn in September, as higher funding costs continued to keep the majority of other regional issuers on the sidelines. Meanwhile, those that did manage to successfully navigate their way through such a challenging backdrop were forced to provide cautious investors with sufficient spread compensation for the privilege, as illustrated by the average new issue concession which jumped to 19.67bp in September, the highest on record.

If non-Japanese investment grade issuers found conditions difficult to traverse in September, then their regional high yield counterparts found an opportunity to fund impossible to come by, having not managed to produce any high yield rated USD issuance whatsoever. That marked the third month out of the past four where high yield issuance drew a complete blank, as ongoing fallout from the distressed Chinese property sector kept the window of opportunity firmly closed.

** US IG: Issuance volume for the month of September was USD110.5bn. This total fell short of respondents' estimates, with the lowest at USD125bn while the highest was USD150bn and the average estimate had been USD143bn. Ex-SSA, September's issuance was USD80.45bn, above only June's USD70.85bn in ex-SSA monthly totals for 2022.

The biggest contributor to September volume was the financial sector. Domestic FIG issuance comprised 14% of September's total at USD14.95bn, while Yankee FIGs produced 23% of the monthly tally at USD25.9bn. Once again, Utilities contributed the least, as the combined Domestic and Yankee Utilities was USD5.9bn (just 5% of September's total).

October issuance tends to be slower than September's. The last time October totals surpassed September's was in 2015, when October produced USD127.37bn vs. September's USD108.17bn. Ex-SSA, the totals were 105.67bn for October vs. USD90.33bn for September. Respondents have forecast an average estimate of USD80bn for October, with the lowest estimate at USD65bn and the highest at USD100bn. The ex-SSA forecast points to USD72.5bn as the average estimate, with USD50bn at the low and USD90bn at the high end; these forecasts should be viewed with October's ex-SSA issuance average being USD94.594bn over the past decade.

** US HY: Primary market issuance was exceedingly light with a monthly volume of just USD9.0bn from five deals (eight tranches), the lowest September volume since 2011. Year-to-date volume stands at USD86.66bn from a total of 127 deal tranches, a reduction in volume terms of - 78% from the same period in 2021. Spreads were higher/wider for the month, with the ICE/BofA US HY Index Average Spread as low as +450bps on Sept. 12, and as high as +550bps on Sept. 29. HY managed funds flows, as measured by Lipper, showed outflows for three out of four weeks in September, totaling USD6.208bn.