High Grade Corporate Bonds Trend – Part 2
By TJ Kim
September 26, 2012
The size of the HG USD bond market has now reached a size of $4.7tn, growing steadily since 2009. The recent expansion of the HG bond market largely owes to the issuance from Domestic and Yankee Non-Financial issuers, while the issuance of the HG bonds from Financials has significantly reduced its stake in the market.
In 2011, 18 issuers were downgraded and thus left the HG market into High Yield or defaulted. However, there was more dollar amount that came into the market due to the upgrades from HY to HG. Credit Research Team from JP Morgan wrote,
“In 2011, about 18 issuers were downgraded from High Grade to High Yield or defaulted, according to Moody’s data. This corresponds to about $42bn leaving the HG market. However, there was about $59bn of upgrades from High Yield to High Grade at the same time.”
In the past, we saw the largest growth in the Investment Grade market in 2007, with $870bn issuance driven by leveraged buyouts. Since then, the third largest additional issuance occurred last year. The research team from JP Morgan forecasts that this year’s issuance will outnumber the last year’s figure.
“Historically 65% of supply comes in the first 7 months of the year. Given the $483bn of supply in the first 7 months of this year and assuming that the 65% historical ratio will be respected again this year, a simple extrapolation of the ytd issuance leads to a full year supply near $750bn. This is $50bn above the 2012 issuance estimate of $700bn we made in January and $50bn more than last year’s supply.”
As mentioned before, Non-Financials are issuing more than they did prior to 2008 while the opposite is true for Financials,
“Applying the same extrapolation to Financials and Non-Financials, we are on track for $225bn for Financials and $525bn for Non-Financials, which compares to the 5yr averages of around $320bn and $390bn, respectively. So, while Financials would issue close to $100bn less than their 5yr average, Non-Financials would issue about $135bn more than their 5yr average.”
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