Gabriel Levy
Global Head of DCM
Global economic and geopolitical instability remained firmly on the agenda in 2023. Yet despite the challenging environment created by rising interest rates and high inflation, debt capital markets (DCM) performed well.
Gabriel Levy, Global Head of DCM, was joined by Caroline Bryant, Co-Head of FIG DCM, Stéphanie Besse, Head of Corporate DCM, and Emmanuel Smiecench, Co-Head of SSA DCM, to discuss 2023 activity across the FIG, corporate and SSA markets, and present their outlooks for 2024.
Positive FIG market performance to continue in 2024
Despite several tumultuous months for interest rates, 2023 ended on a positive note following the Federal Reserve’s (Fed) November announcement that it would keep rates unchanged – prompting investors to become cautiously optimistic about the potential for dramatic cuts throughout 2024. This resulted in a very strong year-end rally for risky assets, with equity volatility moving back into a low range.
For the covered bond market, 2023 was once again marked by significant supply, with a total of €193bn issued – close to 2022 volumes of €208bn. Meanwhile, on the senior unsecured market, there was a 35% year-on-year surge in senior preferred supply – reaching €107bn – while senior non-preferred supply reached €114bn, a 2% increase on 2022.
The subordinated space also performed positively, with additional tier one (AT1) primary supply increasing to €10bn from €6bn in 2022, and tier two primary supply remaining level at €19 bn.
Caroline Bryant
Co-Head of FIG DCM
In 2024, we can expect FIG market activity to remain strong. Issuance levels will remain consistent with 2023, but market drivers will be slightly different. Natixis Research forecasts between €180bn and €190bn of gross EUR benchmark Covered Bond supply, broadly in line with 2023 levels. This will be driven primarily by an expected €118bn in redemptions, 40% of which are expected to take place in Q1. Targeted longer-term refinancing operations (TLTRO) refinancing is also expected to drive Q1 supply, with €450bn due to mature in 2024, peaking in March. Meanwhile, with most large European banks now compliant with MREL, the covered bond market will attract significant activity given it offers a cheaper alternative to unsecured funding.
The senior unsecured market has a more mixed outlook. Senior preferred volumes expected to remain consistent with 2022, reaching around €105-110bn, while senior non-preferred volumes are expected to decrease by 10-15% to around €100bn, with most large EU banks having reached their MREL targets. Key drivers for the market will be the TLTRO refinancing and continued pressure for deposits, which will drive depositors to better yielding alternatives. Meanwhile, supply will be limited by ongoing lower lending volumes resulting from more subdued economic growth and tighter financial conditions.
In the subordinated market, both AT1 and T2 supply will be driven by redemptions, with some room for incremental supply. Natixis CIB estimates total AT1 supply of around €30bn over 2024, and €35-40bn in T2 supply.
Corporate issuance to increase, though issuers remain cautious
2023 was a busy year for the European corporate market. Total new Investment Grade Corporate issuance reached EUR 273 billion despite continued volatility. Notably, we saw rise in activity within the long-term segment, with 13 deals exceeding 15-year tenors taking place in 2023 versus just five in 2022.
The hybrid market experienced better market dynamics in 2023, which translated into higher primary volumes – though the primary market was affected by volatility. In total, issuance in euros increased to €16bn with €12bn in 2022 – though this was mostly concentrated on refinancing. Issuance was dominated by utilities and telecoms, with inaugural issuers also making a return within the segment.
In 2024, the corporate market is expected to continue to perform strongly, and there has already been €20bn of new issuance in January year-to-date. That said, issuers will remain pragmatic, taking advantage of clear windows of stability and maintaining caution during expected periods of volatility. With the upcoming elections in the US, the UK and across Europe coupled with ongoing geopolitical tensions, corporate activity is expected to be concentrated within the first half of the year.
Stéphanie Besse
Head of Corporate DCM
Overall, we expect a 7% increase in corporate issuances – from both investor grade (IG) and high yield (HY) issuers – boosted by better refinancing conditions, increased HY supply, and the early refinancing of Q1 2025 redemptions. In terms of sectors, the auto industry will continue to be one of the biggest primary suppliers, with €60bn in issuance expected in 2024. This will be closely followed by utilities, where we expect to see €53bn-60bn in issuance, with more redemptions and negative free cashflows increasing financing needs for this category. We also anticipate a return to activity for real estate issuers, with roughly €13bn-15bn in issuance expected in 2024.
With massive rates cuts expected this year, we expect the appetite for longer tenors to further increase, and corporate issuers should be able to access longer maturities compared to 2023. Within the hybrid segment, we expect to see around €20 billion in new corporate issuance. We also expect to see continued demand for ESG bonds – notably sustainability-linked bonds – which are currently favoured by issuers as they are easier to address. That said, with regulatory pressures increasing and creating delays to the processing of documentation, some issuers are stepping back from this segment. Together with the strong potential for credit crises, we expect the focus to shift more heavily towards credit in the coming year.
SSA activity will be skewed towards large issuance
Within the SSA market, market conditions remained difficult in 2023. However, compared with 2022, there was a decrease in risk of execution, with the average volume of deals across the year, and across currencies, increasing by approximately 10% – representing a higher number of trades executed and a marked overall increase in oversubscriptions. Activity windows were also more open than in 2022, supported by the normalisation of spreads and cheaper assets resulting from monetary policy, which increased buying power.
That said, with liquidity remaining under pressure, swap spreads underperformed quite significantly. This was largely the result of rate hikes, the discontinuation of public sector purchase programme (PSPP) reinvestments and limited reinvestments in the pandemic emergency purchase programme (PEPP).
The forecast for 2024 remains uncertain. While inflation is under control and central banks are expected to cut rates, as demonstrated in recent years, unexpected events have the potential to considerably affect the trajectory of the market. The European Central Bank (ECB) will also announce a reduction in its balance sheet in the first half of the year, and quantitative tightening could put pressure on spreads. As such, the focus in the coming year will be very much on when and how execute funding.
Emmanuel Smiecench, Co-Head of SSA DCM
So far this year, we have seen strong SSA market activity. Issuance in the first two weeks of January reached €90bn in the Euro market, versus €60bn in the same period in 2022. Oversubscriptions were high and we also saw a slight increase in issue premiums. However, we are still seeing record high levels of supply and the question will be whether there is enough market demand to absorb this.
Looking ahead, liquidity pressures will continue to weigh on smaller issuers. As such, for 2024, we expect to see a strong focus on big names and large issuance within this segment.
