Vito Sperduto
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value in an ever changing world, with insights and outlooks from the RBC Capital Markets team. I'm Vito Sperduto, Head of RBC Capital Markets, US. In this episode, we'll be talking to Rob McCormack, global head of our Debt Capital Markets platform, and Ally Mackinnon, head of UK corporate debt capital markets, about the recent changes to our capital markets business. They'll not only share their insights and discuss the implications of this strategic move, but we're also going to provide a state of the market global view into capital needs and investor appetites across the DCM sectors, and take a deeper look at ESG as well. Rob is based in our New York office, and Ali in our London office. Rob, Ali, welcome to the podcast.
Rob McCormack
Thanks, Vito.
Ally Mackinnon
Thanks very much. Vito,
Ally Mackinnon
So, Rob, why don't we just start off? I think, you know, we've talked a fair bit about the high level of activity in your marketplace, especially as you know, as we'll talk about in the podcast, there's a fair amount of refinancing occurring as we start the redemptions from the wave of covid financings in that low rate environment that we had in 20 and 21 But you know, certainly we've been an active participant in this marketplace for some time, but as we look at the new global structure for investment banking here at RBC Capital Market, and we think about sort of the restructuring that's merged our regional investment banking units into a global model. As part of that, we also took Debt Capital Markets and moved that franchise from global markets and into our global investment banking business, just feeling that that was a greater alignment for our clients. But maybe I, I'll turn it to you, Rob, and ask, what has been the significance of this move for your team and the work you're doing, and especially the impact on our clients?
Rob McCormack
Thanks. Vito, yes, it's certainly been an incredible year with a significant increase in issuance year on year across all of the markets that we cover as clients seek to accelerate their issuance and get in ahead of some volatility towards the end of the year, particularly with the election and some of the geopolitical concerns surrounding at the moment. But it's a nice place to start the restructure of our platform is a really exciting one. And when you think about typical investment banks that they have a markets business and an advisory business, we call it global markets and global investment banking. As you say, Debt Capital Markets previously sat within global markets. We've moved to align our business under Global Investment Banking, and then really simplify what our global investment banking model looks like. So we now have three core verticals, and the main pillar through those is the coverage vertical. And either side of that, we have an M&A vertical and a capital raising vertical. The capital raising vertical is we're calling global investment banking capital markets, and within that stream is now housed Debt Capital Markets, alongside six other core capital raising products, which are equity capital markets, leverage finance, private capital, project finance and capital structuring and advisory. And what this does is set us up to be more impactful with our clients, to have a more seamless discussion right across the capital structure with our clients, right from that first meeting. So that should we bring a great M&A idea to our clients, we can instantly talk about how we propose they could fund that with any product, right across the capital structure, from senior secured debt all the way through to equity. So when you think about our Debt Capital Markets platform. It's a significant business. We will do six or 700 deals a year for our clients. We have Debt Capital Markets people in offices in Toronto, Montreal, London, Paris, Frankfurt, New York and Sydney. And that, that is about 110 people globally. So to be able to integrate those discussions with our partners in equity capital markets, leverage finance and project finance, and have a seamless capital raising discussion makes for a really powerful, you know, session with a client to really think about how best to fund or refinance capital raisings or acquisitions that they may be thinking about. So it's an exciting time. It's a great development. It's a natural evolution in our business, as we've seen, our RBC Capital Markets has really grown significantly over the past five years, and this really sets us up for future growth and to continue to be a really trusted partner to our core clients.
Vito Sperduto
Well, look, I think we're already seeing some of the benefits of this, you know, for ourselves, RBC, and you know, a lot of that's due to the benefits that our clients are receiving. So maybe let's pivot a little bit and just talk about the current state of the market. And you know, Ally, I'll turn to you, but you know, what feedback are you receiving from clients, both issuers and investors, about the future landscape, and particularly regarding their capital requirements and investment preferences? I know, when we think about the marketplace, we always think about, okay, well, what are the use of proceeds? Are we looking at, you know, ideally in my prior life, you know, M&A transactions, which I'm always excited about. Or, you know, are we looking at refinancing debt maturities that are coming up, and as we mentioned at the start of the podcast, there is certainly a wave of covid financings that occurred in that low rate environment that have been coming due this year and will be coming due for several years forward. So I'm sure that we're you know, that's driving a bit of it. But what are you seeing? Let's maybe we start off with the marketplace you're currently sitting in. But what are you seeing in the UK and Europe?
Ally Mackinnon
Thanks. Vito, yes, all of the above. Our clients are large multinational borrowers who are funding these significant debt programs on an ongoing basis, or doing it for general corporate purposes, for M& A as we move into cycle, there for share buyback programs, for capital expenditure, and they're looking to optimize capital structure. They're mindful of currency requirements, net investment hedge capacity. They've got an eye on relative value, and they're consistently looking to broaden their stakeholder base for long term sustainable investors. So having accelerated funding plans into the first half of 2024they've taken risk off the table ahead of this election, and they've been nimble around the snap elections in the UK and France this summer as well. So we've seen a material increase in supply in euros and in dollars, upwards of 25 -30% as our corporate clients look to move into lower outright coupons and lower credit spreads. And so we're headed into this last quarter of 2024 and we're looking into 2025 and we're feeling pretty good. We're in a well-funded position. Markets continue to be constructive. Rates are coming down. The easing cycle has begun, and credit spreads remain historically tight levels. We've got our eye on three key things. We've got this, this credit spread compression that is supportive to issuers right down the credit spectrum. So we have the difference between a single A rated borrower and triple B rated borrowers significantly narrower than it has been. For context, a triple B rated issuer is now funding at a long term average of Single A borrowers. That's a nice beta compression. It's a nice opportunity for corporates to take advantage of. We're watching interest rate curves as well, still elevated at the front end, still inverted. Yes, we're moving into this easing cycle, but we're still enjoying an opportunity to fund intermediate dates and long term financing. So five year treasuries at three and a half percent. 10 year treasuries at 3.75% and fed funds at 4.75 to 5% — so that means a lot of our borrowers can fund without experiencing cost of carry, which is a great opportunity for them to again, take risk off the table. And then finally, we're watching inflows. We've had consistent inflows into fixed income supporting performance in credit spreads. This year, we've had over 50 billion of inflows year to date, and that compares to call it 15 billion of inflows last year. That's supporting this constructive market. We've got rates coming down, credit spreads and historical types and investors who have money to put to work. So it's allowed us to move through periods of macro volatility in short order.
And so what the question that we're getting from CFOs and treasurers here in Europe,
they're wondering what, what they should be worried about. You know, markets are really constructive. What could move things from here? And that's been the consistent refrain from our clients. So I'm looking through to 25, 26 and 27. Vito, you talked about that covid refinancing position. Corporate redemptions are stepping up by 35% over the next few years. And so we're looking to, you know, how are we going to fund through that? Can we take advantage of this constructive market now to start to refinance some of those redemptions?
We're also looking at increased financing requirements from the likes of the utility sector. So that's one of RBCs power allays. From a sector perspective, we see potential for issuance to increase there by over 50% in the next five years, and that's due to increased capital expenditure to support the energy transition.
And then finally, I'm mindful of potential asset allocation shifts. So if rates are continuing to come down, does fixed income start to look less attractive, and do spreads drift wider because of that, those inflows have supported spreads and concessions through macro volatility this year. And so if we don't have the same level of inflows next year, could we see spreads widen, longer periods of volatility and more challenging markets and so these are the things that I think are the counterbalance to this really constructive environment.
Vito Sperduto
Rob, maybe let's pivot the conversation a little bit. I think one of the benefits of our global footprint, and certainly the levels of activities we've seen in the past, have benefited from cross border opportunities. And you know, certainly in my in my prior role, when I was running global M&A, we always watched the global M&A activity that was cross border based. You know, we've certainly seen lower levels of that post covid versus what we've experienced historically. But I know that with our global footprint, you know, we're positioned for it, but you know what trends or patterns are you seeing around cross border issuance? Because I think we're always trying to figure out where the most efficient markets are for our clients and so many of our largest clients that are working with you and the team have global footprints. Already have global needs, and they want to do local financings to support their local businesses. So are there any factors influencing investor demand for cross border debt instruments?
Rob McCormack
So it's a great, great point. Vito capital will only continue to become more global, and we've seen that over the past three years. What we've found is that under this new global construct, we're able to have a complete capital raising discussion with our clients across the global markets. And so whereas before, we were perhaps somewhat siloed in our approach, in that the US team would be focused on the US market and the Australian team focused on the Australian market, we're now having a much more seamless global discussion with clients across all markets. And when you think about the record volumes of issuance that we're seeing. You know, the ability for our clients to access those markets, regardless of where they're domiciled, is really important. When we think about the increase in issuance in the US, where is that coming from? 70% of that supply so far has come from domestic issuance, whereas what we're seeing is Yankee issuance, so companies domiciled in areas or regions other than the US, is up significantly, and particularly in the industrials and financial sectors, we've seen a 50% increase in issuance from offshore financials into the US. And so that theme really will continue as we see it… Particularly when we think about the nature of the preferred capital and the hybrid capital market in the US, we've seen a significant increase year on year. Volumes are up about 200% - we haven't seen this level of issuance in that space since 2021 - and I think that's really getting noticed by financials in other regions. So the ability to get capital relief, balance sheet support, financing flexibility for M&A that just because that's in the US dollar market, doesn't preclude issuers from other regions from accessing that. And the conversations we're having with clients really focuses on tapping into and accessing the best opportunity, whichever market that happens to be in at that point in time. And we're well placed to do that. I mean, we're, we have a top 10 DCM franchise in the US dollar market, the Sterling market, the Aussie market and the Canadian market, and in fact, we're top five in in three of those. So bringing to bear the power of those platforms for our clients globally is going to be really important for us going forward.
Vito Sperduto
Just to highlight some of that for the listeners, I mean, we've got a pretty substantial team,
You know, I think Rob, it's about 80 or so plus globally, 25 in Toronto, where we have a number one market share. 25 in Europe, between Paris, Frank with Madrid, Amsterdam and so forth, defending our position as a leading international bank in sterling and the Bank of choice for Yankee issuers and US dollars. And you know, we're certainly challenging a lot of the Bulge brackets and European banks in euros. So look, I love our position. I think we're in a really advantageous place and it's all through delivering a differentiated solution for our clients, which, at the end of the day, is what makes sense. And maybe Ali, on the client front, we've had some really good recent wins in the Euro/UK corporates accessing the US markets. Maybe talk a little bit about that.
Ally Mackinnon
Yeah, we certainly have Vito. And this year has been, this year's been great. In that regard, we've brought Nestle, Vodafone, we've been worked with the autos, Mercedes and Volkswagen, with utility companies RWE and EDF, so really a broad range across our client base. You know, one thing in particular around that is this continued interest to diversify the funding sources. Focus on the utilities a little bit here, you know, as they look for financing for their increased capital expenditure, they're looking to different markets to access relative value new stakeholders, and that's where the global structure of the DCM platform really, really plays to our strengths. So we brought RWE to the US market for their inaugural issuance. We worked with EDF both in dollars and in Canadian dollars, again, building out.
That stakeholder base to expand for those long term sustainable investors.
Vito Sperduto
Maybe another pivot, let's, let's talk about sort of different types of financing in your market. And I know ESG related issuance in the Debt Capital Markets has been gaining traction in recent years, and I think in 2024 we certainly have seen that trend continue, as corporates and sovereigns increasingly have prioritized sustainability, linked bonds and green bonds and the like social bonds, and reflects the growing importance of environmental social and governance factors and investment decisions.
We might have seen some less usage of the term ESG, but certainly the underlying financings have still been occurring. And so I think it'd be good to just kind of have a conversation around how ESG is impacting the landscape. Ally, you know, I know you're a key champion of our ESG efforts. What? Are you seeing with clients?
Ally Mackinnon
Yeah, so it's a great question, Vito, It's an important area of focus for us, both at enterprise and from a capital markets perspective, when we when we look across the commitments that RBC has made this year and in the past, you know, we're really excited to support our clients and our communities as we accelerate into this transition to a greener economy, we've we announced three commitments earlier this year, and these are relevant to us as we partner with our corporate client base. The first was to triple lending for renewable energy from 5 billion to 15 billion, and to grow our lending to low carbon energy to 35 billion by 2030. We're also allocating a billion dollars by 2030 to support and scale innovative Client Solutions, and we've expanded our sustainable finance framework to include decarbonization activities to accelerate capital deployment to emissions reduction efforts.
And so all that being said, what it means is that our commitment to sustainable financing, is very strong momentum in this market continues. We've got corporates that are continuing to feature green bonds within their issuance programs. Overall, bond issuance is more than 800 billion year to date, so it's up 7% from last year, and green bonds are a key feature of that.
Vito Sperduto
You know, look, when we think about this, we do think that this topic, ESG, is good for business. And as we're, you know, as we think about our business, for example, it is an incremental product and incremental alternative for our clients. And I think we want to support them with all the opportunities that they can consider. And, you know, obviously this is good overall. And as I mentioned earlier, you know, maybe we've seen the term ESG less mentioned, but the underlying principles and sort of financings and the like continue to be drivers. But what's your take on it in terms of this, you know, bifurcation by market, or this, you know, how it's being treated?
Ally Mackinnon
Yeah, I think that's right. So I think the sustainability profile of a company is very important to investors here in Europe and the euro market continues to focus on understanding a sustainability profile, to understanding how an issuer is integrating these important aspects we're seeing that manifest in continued focus on an issuer's ESG rating. And so we're moving a little bit away from labels and more towards that whole holistic perspective on the company, the ESG rating as a proxy for the issuer sustainability profile, and that's where we're really focused on our advisory work on opportunities within this market to speak to issuers about how they can appropriately disclose the work that they're doing, to be responsive to investors questions around the work that they're doing, and really leading with advice about communications on ESG ratings, because that's what investors are focused on.
Vito Sperduto
Maybe that's a great point to end on. And I want to thank you both for being here, and especially highlighting the new global structure of the business. Certainly, we're going to see a lot more issuance in your markets this year, but especially in the coming years, based on what we talked about. So thank you both for joining and you know, look forward to having you on again.
Rob McCormack
Thanks, Vito.
Ally Mackinnon
Thanks very much, Vito.
Vito Sperduto
You have been listening to Strategic Alternatives the RBC Capital Markets podcast. This episode was recorded on September 26 2024. Listen and subscribe to Strategic Alternatives on Apple podcast Spotify, or wherever you listen to your podcasts. If you enjoyed the podcast, please leave us a review and share the podcast with others.