Debt markets boom amid growing confidence during second biggest year on record

For some bankers, ‘weekdays blurred into the weekend’ because of an intense workload in 2021 as well as the pandemic work-from-home at times. Here’s how.

Paul Neumann, head of Australasian debt capital markets at UBS, says 2021 has been busy across all sectors in the Australian market. Picture: Jane Dempster / The Australian

The past year has been the second-biggest for debt capital markets on record.

For some bankers “weekdays blurred into the weekend” – not only because of the need to work from home at times in the pandemic, but because of the intense workload.

“People tend to focus on 2020 as the largest year for supply, but 2021 has been really busy across all sectors and in the Australasian market, we had our biggest year for corporate issuance,” says Paul Neumann, head of Australasian debt capital markets at UBS.

“In terms of volumes, everything has been firing on all cylinders, whether it’s government spending, corporate mergers and acquisitions, or banks returning to a more normal funding program.

UBS has averaged a deal a week across its business in the past year.

According to Dealogic, UBS was ranked fourth in DCM in Australia and the region – behind Citi, Westpac and CBA – and was first in the segment in which it is active. “Debt capital markets tend to see more deals than ECM (equity capital markets) or M&A, where the transactions have a longer gestation period,” Neumann says.

“This year has been especially the case with a lot of different borrowers – governments, banks and corporates – across a broad range of markets and products.

“In terms of debt products for example, it’s not just bonds, but term loans in the US, acquisition financing, bank debt, bank hybrids and convertible bonds, across every market.

“You find weekends blur into week days.

“The work-from-home thing has certainly made us more accessible.”

Whereas in early 2020 corporates were raising emergency funding and governments and central banks were implementing an unprecedented degree of stimulus, 2021 saw more confidence in the longer-term outlook, even as central banks dialled back their stimulus amid signs of inflation.

“The market is certainly challenging assumptions around central banks,” Neumann says.

Since the start of the year the US market has gone from pricing in one Fed rate hike by the end of 2023 to five.

So will clients be rushing to get through the gate before a potential lessening of liquidity?

“We always in our market like to say ‘issue sooner rather than later’ and ‘fund when you can, rather than when you have to’. Some of the issuance activity this year definitely is evidence of this,” Neumann says.

“Despite all the government bond yield volatility which normally should create some volatility in corporate bond markets as well, to be honest, it hasn’t impacted demand.”

UBS has seen persistent inflows into bond funds over the course of the year, and because of that, demand has remained intact with attractive yields and spreads available to issuers.

“Strong liquidity has supported demand for issuance while spreads are still close to their ‘tights’ (narrowest differentials to government bond yields), creating very attractive issuance conditions,” Neumann says.

“In the second half of 2021 we’ve seen issuers bringing forward their funding plans or refinancing early and this is just a reflection of what we’ve seen globally given the strength of the market.”

He expects that to continue as long as the market is “available”.

“We have seen what can happen during pockets of volatility, where it (the corporate debt market) does shut or starts becoming very expensive,” he says.

“You don’t want to be in a position where you need to or feel the need to fund at those points.”

So a prudent approach is likely to prevail amid doubts that such good conditions will last.

The question for many will be just how much they can refinance early.

“Most wouldn’t refinance a 10-year bond that you issued last year, so there is a limit to how much people will bring forward, but if you issued at the wides (spread to government bonds) of Covid – if you’re an airline for example, maybe now you will think about refinancing that early, given the coupon cost. But people have certainly seen the market and decided to access it a bit earlier than they normally would have, just looking at the strength, and the costs of refinancing early are a bit lower than normal and I think that probably continues.”

Also key for 2022 is the elevation of environmental, social and governance considerations.

“ESG financing has certainly been the other big topic of the year, whether it be bond format or loan format. We’ve seen an exponential increase in issuance globally around that and next year will be exactly the same,” Neumann says.

UBS expects ESG-linked bond issuance to break the trillion dollar mark next year.

“It started with the move to net zero, but now it’s much more with ESG a central part of investment processes and corporate strategies.

“From an investor perspective, it has just become a central part of investment processes. It’s no longer just a case of ‘we don’t lend to X and that’s our ESG strategy’; it is deeply intertwined.”

He says ESG has also been a major driver of M&A and corporate strategy, particularly in oil and gas. “It has gone beyond ‘let’s issue a green bond to fund some solar panels on a roof’ to ‘let’s issue a bond that is linked to our corporate strategy – a sustainability-linked bond – where we get penalised if we are not actually on track to meet the goals.”