New issue volume was exceptionally strong in the second quarter, totaling $275.5 billion, the highest quarterly level in recent years. Issuance advanced 53% from the previous quarter and was in aggregate up across financial and industrial sectors, as well as in high grade and high yield. Investment-grade financials contributed $150.4 billion to new issue volume, up from $106.4 billion in the first quarter, while investment-grade industrials tallied $91.7 billion, up from $63.6 billion in the first quarter. The speculative-grade sector also showed some vigor with issuance rebounding to $33.3 billion from just $9.5 billion in the first quarter. Due to still-depressed syndicated loan market activity, for the first time in several years the par value of newly minted bonds topped the par value of newly originated loans in the second quarter and for the first half of the year. For perspective, in 2006 and 2007, total syndicated loan volume surpassed total bond issuance by a margin of roughly 2 to 1. In contrast, in the first half of this year, LPC/Reuters reported syndicated loan volume of $411.9 billion while bond market volume stood at $455.0 billion. Total bond issuance in the first half of the year in fact topped bond refinancing needs by a margin of 1.8 to 1. In other words, new issuance volume at $455.0 billion exceeded by a significant margin bond volume of $252.9 billion scheduled to mature over the six-month period. The decline in commercial paper and syndicated loan volumes, however, suggests that some issuers simply replaced other forms of debt with bonds.
Second-Quarter 2008 Highlights
Overall, downgrades affected 3.1% of market volume in the second quarter while upgrades affected 0.8%. At the investment-grade level, the effect of negative and positive rating changes was 2.1% and 0.6%, respectively. Downgrades affected 8.2% of speculative-grade volume and upgrades affected 1.7%.
All the broad rating categories contributed to the quarter’s downgrade tally of $115.4 billion. The ‘BB’ rating pool produced the largest share at $31.9 billion, with GMAC contributing 87% of that volume. Consequently, the ‘BB’ category also had the highest downgrade rate, at 13.9%. The ‘BBB’ rating class produced another $31.2 billion in downgrades, with telecommunication and building and materials providing the bulk of that activity. Residential Capital comprised nearly 70% of the $16.4 billion of ‘B’ downgrade volume. The ‘AA’ rating category contributed the next-largest share at $14.9 billion with nearly all coming from the banking and finance sector. The majority of the quarter’s $29.1 billion in upgrades occurred at the ‘BBB’ level and consisted of positive rating activity in banking and finance and utilities. Bank of America Corp.’s acquisition of Countrywide Financial Corp., coupled with JPMorgan Chase’s purchase of Bear Stearns accounted for the banking and finance ‘BBB’ upgrades, while the utilities sector featured the upgrade of Virginia Electric Power. Speculative-grade upgrades were fairly evenly distributed, totaling $10.8 billion.
Second-quarter downgrades were concentrated in the following sectors: banking and finance ($64.7 billion, 4.0% of sector volume); telecommunication ($18.5 billion, 10.6%); building and materials ($11.8 billion, 29.0%); and broadcasting and media ($4.5 billion, 4.6%). Adjusting for industry size, downgrades were most pronounced in building and materials (29.0% of sector volume downgrades); telecommunication (10.6%); broadcasting and media (4.6%); and gaming, lodging and restaurants (4.2%, $2.4 billion in downgrades). Seventeen sectors experienced some downgrades in the quarter, compared with 18 in the prior quarter.
Leading second-quarter upgrades: banking and finance ($14.2 billion, 0.8% of sector volume); utilities ($5.9 billion, 2.1%); chemicals ($2.3 billion, 6.1%); and energy ($2.3 billion, 1.2%). Again, adjusting for industry size, upgrades had the biggest effect on chemicals (6.1% of sector volume); utilities (2.1%); energy (1.2%); and computers and electronics (1.2%, $1.0 billion in upgrades). Twelve sectors experienced some upgrades, a meaningful drop from first-quarter results when nearly every industry tracked by Fitch experienced some upgrade volume.
New issuance reached a robust $275.5 billion in the second quarter, up substantially from the $179.5 billion recorded in the first quarter and even registering an 8% increase year-over-year (relative to 2007’s second-quarter issuance activity). Investment-grade issuance totaled $242.1 billion, contributing 88% of issuance volume in the second quarter, and was up 42% quarter-over-quarter. Speculativegrade issuance at $33.3 billion also rebounded from the first quarter’s dismal $9.5 billion in issuance. Of special note, ‘CCC’ new issue volume of $11 billion was more than in the prior three quarters combined.
Financial issuance totaled $157.2 billion in the second quarter, up from $106.4 billion in the first quarter and $143.2 billion in the second quarter of 2007. Second-quarter issuance among industrials reached a new high of $91.7 billion, well above the prior quarter’s $63.6 billion. In the second quarter, four issuers completed deals sized at $5 billion or larger and 24 issuers completed transactions greater than $1 billion. There were no $5 billion transactions in the first quarter and 15 at the $1 billion mark. Similar to first-quarter activity, the opportunity to secure financing at a still reasonable cost offered strong motivation for investmentgrade industrial issuers to tap the bond market. Issuance among financial firms was spurred by the need to boost capital levels.
On a quarter-over-quarter basis, 17 of the 25 industries tracked by Fitch experienced growth in new issue volume. The biggest quarter-over-quarter gainers were banking and finance ($133.0 billion in the second quarter versus $97.5 billion in the first quarter); insurance ($24.2 billion versus $8.9 billion); health care and pharmaceutical ($17.5 billion versus $5.5 billion); and cable ($10.8 billion versus $0.5 billion). The biggest laggards included gaming, lodging and restaurants ($0.6 billion in the second quarter versus $8.6 billion in the first quarter); transportation ($3.1 billion versus $7.4 billion); consumer products ($0.3 billion versus $2.6 billion); and supermarkets and drug stores ($0.5 billion versus $1.5 billion). Issuance patterns followed economic themes, with sectors most affected by the housing and economic slowdown showing weakness.
While syndicated loan issuance improved in the second quarter, it grew at a slower pace than bonds. According to LPC/Reuters, loan issuance totaled $229.6 billion, up from $182.3 billion in the first quarter but still well below 2007 quarterly levels, which averaged $422 billion. Leveraged loan issuance totaled $84.1 billion in the second quarter, up from $60.4 billion in the first quarter but, as with overall loan issuance, down dramatically from peak levels in 2007 that reached in excess of $200 billion per quarter. While second-quarter leveraged loan volume still topped the $33.3 billion in newly minted high yield bonds, overall loan market activity of $229.6 billion actually fell below total bond market issuance of $275.5 billion.
Coupons across the ‘A’ and ‘BBB’ rating categories moved higher in the second quarter, to 6.00% and 6.50% from 5.89% and 6.14%, respectively, in the first quarter. Inflation fears put upward pressure on investment-grade yields. In contrast, median coupons on newly originated speculative-grade bonds generally retreated during the quarter. The ‘B’ rating category exhibited the sharpest decline, falling to 9.38% from 10.88% in the first quarter. A technical factor likely contributing to this trend, however, was the slim supply of issuance in the first quarter. Spreads followed a similar tightening pattern. Ten-year spreads across the ‘BB’ and ‘B’ rating categories contracted during the second quarter. Nevertheless, at 423 and 499 basis points, ‘BB’ and ‘B’ spreads, respectively, each remain roughly 200 basis points higher than their levels one-year ago.
Fixed-rate bonds continued to be popular in the second quarter, representing 83% of issuance. Particularly among financials, fixed-rate issuance⎯at 72% in the second quarter, 58% in the first quarter of 2008 and 74% in the last quarter of 2007 reversed issuance patterns prior to the credit crisis when financial firms typically chose floating-rate bonds by a ratio of 2 to 1 over fixed-rate bonds. Across industrials, fixed-rate issuance continued to dominate, making up 97% of all new bonds brought to market.
Industrial companies once again favored long-term bond sales in the second quarter, as evidenced by 63% of new issuance carrying maturities of 10 years or more. This figure was consistent with the 62% recorded in the first quarter and 67% seen in 2007.
As of June 30, 2008, the U.S. corporate bond market totaled nearly $4.0 trillion in size, split 83% investment grade/17% speculative grade. The market’s rating composition at quarter’s end consisted of the following: ‘AAA’, 6.2%; ‘AA’, 24.4%; ‘A’, 31.0%; ‘BBB’, 21.1%; ‘BB’, 6.0%; ‘B’, 7.7%; and ‘CCC’−‘C’, 3.7%. When examining the market’s rating mix across the pool of industrial issues alone, the share of bonds rated speculative grade was noticeably higher at 30%.
The par value of bonds scheduled to mature for the remainder of 2008 stood at $308.1 billion at the end of June, compared with $194.9 billion scheduled to mature over the same time horizon one year ago. The majority of this volume (97%) consists of investment-grade issues ($297.4 billion), with the rest speculative grade. Of the high grade paper slated to mature, most is concentrated in banking and finance ($224.6 billion).
Approximately 1.6%, 4.5%, and 4.5% of speculative-grade bond volume is scheduled to mature in 2008 (six months), 2009, and 2010, respectively, totaling $72.8 billion. Of this total, 18.5% is rated ‘CCC’−‘C’, of which 69%, or $9.3 billion, comes due in 2010.
Among industrial issuers, $56.4 billion in bonds is scheduled to mature over the coming six months. Utilities lead with $9.0 billion in bonds coming due (or 3.1% of utility volume outstanding), followed by food, beverage and tobacco ($5.8 billion, 5.5%); computers and electronics ($4.7 billion, 4.8%); and health care and pharmaceutical ($4.7 billion, 2.9%). Over the next two and a half years, utilities still lead industrials, with $34.9 billion coming due, but telecommunication ($24.3 billion), energy ($22.4 billion), and retail ($19.9 billion) become the most prominent.
According to Fitch’s U.S. High Yield Default Index, the speculative-grade par default rate ended the first half of 2008 at a year-to-date level of 2.9% and a trailing 12- month rate of 3.1%, up from just 0.5% at the end of 2007.
