What trends have been catalyzing momentum in the debt markets?
Patrick McDonald: 2024 has been a strong year for debt capital markets, driven by several key emerging trends. One consistent theme across markets is the presence of record levels of primary supply, set against a constructive market backdrop. Supply and deal flow has been very healthy and diversified across sectors, spanning ratings, maturities and products.
Vito Sperduto: We’ve certainly seen a pickup in activity across Canada. What makes Canada so attractive to issuers?
Patrick McDonald: The Canadian bond market currently offers positive funding conditions, with favorable pricing dynamics leading to an increase in bank financing. There has been a notable increase in the issuance of Maple Bonds and increased momentum in the issuance of hybrid capital structures. Financial institutions have played a leading role in driving an uptick in volume, with corporates taking advantage of attractive pricing and coupons.
Rob Lamb: It’s a similar picture in Europe, which has also seen an increase in volume, with issuers implementing ambitious funding plans supported by falling yields and credit spreads. We've seen a 28% pick up in European corporate supply, with the European mid swap rate falling by 1% since mid-2023, creating attractive funding conditions for corporates.
What driving deal activity?
Rob Lamb: U.S. companies have been attracted by lower yield rates in the Eurozone, accounting for five of the ten biggest deals this year. This trend has been facilitated by U..S companies seeking lower coupons, while a growing preference for issuing Tier 1 capital has helped investors lock in relatively high yields in a potentially record-breaking year for this type of asset class.
“US companies have been attracted by lower yield rates in the Eurozone, accounting for five of the ten biggest deals this year.”
Rob Lamb, Head of European Debt Capital Markets
Vito Sperduto: Are we likely to see increased M&A activity?
Rob Lamb: The balance sheets of U.S. corporates are in a good place, with most of the major economies experiencing improved trading conditions. However, M&A activity is presently muted, with corporates preferring share buybacks to shore up their financial position.
Over the last year, the biggest U.S. companies have repurchased a trillion dollars of shares, albeit they've still got over $2 trillion of cash on their balance sheet. Buybacks have also taken place in Europe, though to a lesser extent, while dividends are on the rise and cash yields have declined, providing a boost for bond markets.
How are firms navigating shifting M&A dynamics?
Patrick McDonald: While the M&A picture remains muted, there are early signs of a potential uptick in activity, with large transactions in Europe such as the Danish firm DSV’s recent deal to buy Shenker, part of Germany’s Deutsche Bahn (DB) state railway – the largest sale in DB’s history.[i]
The M&A space has also seen rising interest in callable structures that enable issuers to accelerate deleveraging by redeeming and pre-paying short-term debt. Hybrid capital is also a notable theme to emerge. It helps firms optimize their debt capacity by capturing 50% equity credit from the rating agency, with 50% contributing to debt. This helps maximize M&A capacity through hybrid capital. Whether in euros, sterling, dollars, or Canadian dollars, there is encouraging capacity for M&A. As the situation improves, we believe the market will be receptive to debt finance acquisitions.
“Hybrid capital is a notable theme that has been helping firms maximize M&A capacity”
Patrick McDonald, Co-head, Canadian Debt Capital Markets, RBC Capital Markets
How have elections impacted activity in 2024?
Rob Lamb: Both corporates and financial firms front-loaded their supply in the first half of the year in anticipation of major elections in France and the UK. Despite potential disruption, issuers were still able to meet their 2024 funding requirements, with record volumes in Europe and the U.S. Issuers are now looking ahead to their 2025 plans.
Vito Sperduto: November’s U.S. presidental election is being studied carefully by markets. While some will likely sit on the sidelines amid uncertainty, how are corporates placed to handle the situation?
Rob Lamb: Despite uncertainty, most corporates are well-positioned to manage any election volatility, which will likely stabilize against a positive economic backdrop and central banks easing their rates. It may be that markets are less accessible during and immediately after the US election, but we feel constructive that we’ll see that supply continuing. There is a sense that issuers are just going to drive through the election noise.
