Santander’s analysts explain that the primary is practically closed. The strong market volatility has been accompanied by an almost total closure of the European primary. With only €2.3 billion in the week and with little investor appetite, as orders barely covered the nominal amount of the issue (average b/c of 1.2x). Most of the issues were of a defensive nature, being covered bonds (€750mn) and senior IG debt (€1mm), while there was only one high-beta issue: the €500mn HY debt of Swedish company Verisure.
Bond issuance declines, bank lending soars. In fact, the drop in corporate issuance is occurring in parallel with strong bank lending growth of 8.7% YoY (end-August figure, according to the ECB), well above the +3.7% average during 2018-19 (pre-pandemic).
The cost of refinancing €IG is at record highs and higher than the cost of borrowing. One of the main reasons for this drop in corporate issuance is the sharp increase in the cost of new debt. Thus, the cost of new €IG debt has increased by 344bp in 2022 to 4%. It is almost three times the cost of existing debt, which has an average coupon of 1.5%.
Thus, the average refinancing cost (yield – coupon) has already reached an all-time high of 242bp, up from 173bp in October 2008. Similarly, the yield on €HY debt has increased by 540bp in 2022 to 8.2%, more than double the current average coupon on existing €HY debt of 3.5%.
Moreover, the cost of corporate bonds also exceeds that of bank loans, which at the end of August were quoted at 2.1% (latest figure provided by the ECB) compared to 2.7% for €IG debt.