Sullivan & Cromwell LLP | Catherine M Clarkin | John Horsfield-Bradbury | Ekaterina Roze | Cameron Teschuk
Global | United Kingdom | USA
This article is an extract from Lexology Panoramic: Debt Capital Markets 2025. Click here for the full guide.
In 2024, global debt markets improved significantly following consecutive years of reduced activity in 2023 and 2022. Incremental rate decreases in the United States, the European Union and other countries in response to lower levels of inflation and continued market resiliency despite global geopolitical uncertainty provided favourable conditions for global issuers across multiple geographies and sectors.
According to data from LSEG, global debt issuances of US$8.3 trillion during the first nine months of 2024 were up 18 per cent compared to the first nine months of 2023, reflecting the strongest period for debt capital markets since 2020. The first nine months of 2024 saw approximately 25,000 new debt offerings, which represents a 9 per cent increase compared to the same period in 2023 and an all-time record according to LSEG. New issuances increased significantly across multiple sectors and geographies. The total number of new issuances in the first nine months of 2024 increased by 17 per cent globally, driven by increases in Europe (17 per cent), Americas (36 per cent), Asia-Pacific (5 per cent) and Africa/Central Asia (70 per cent). Issuances by financial issuers and government and agencies comprised approximately 70 per cent of global issuances through the first nine months of 2024, reflecting increases of 19 per cent and 4 per cent, respectively. The number of new issuances by industrials, energy and power, healthcare and other issuers all increased by over 30 per cent during the first nine months of 2024.
Global investment-grade corporate debt issuances of US$4.1 trillion were up 19 per cent during the first nine months of 2024 compared to the first nine months of 2023, marking the strongest period for global high-grade corporate debt on record. Increases in global investment-grade debt issuances were driven by an especially strong third quarter of 2024, reflecting a 9 per cent increase compared to the second quarter. High-yield debt issuances of US$320.6 billion increased 86 per cent during the first nine months of 2024 compared to the first nine months of 2023. Notably, three markets – the United States, United Kingdom and France – accounted for nearly three-quarters of all high-yield debt issuances during the first nine months of 2024.
Global green bond issuances also increased in 2024, but at a lower rate than investment-grade and high-yield issuances. According to data compiled by LSEG and the Climate Bonds Initiative, green bond issuance totalled US$380.5 billion during the first nine months of 2024, reflecting an increase of 8 per cent compared to the same period during 2023. However, new issuances of green bonds slowed in the third quarter of 2024, reflecting a 15 per cent decline compared to the second quarter of 2024. Overall, the proportion of global green bond issuances as a percentage of global bond issuances decreased from approximately 5 per cent during the first nine months of 2023 to approximately 4.6 per cent during the first nine months of 2024.
Emerging markets corporate debt issuances totalled US$271.6 billion in the first nine months of 2024, representing an increase of 28 per cent compared to the same period of 2023. Corporate debt issuers from India, Saudi Arabia, Brazil and the United Arab Emirates accounted for 53 per cent of emerging markets activity during the first nine months of 2024. Local currency bond offerings in Asia of US$2.9 trillion increased 3 per cent during the first nine months of 2024 compared to the first nine months of 2023, reflecting the strongest amount on record.
Market environment
Despite the continued prevalence of macroeconomic and geopolitical challenges throughout 2024, global bond markets remained resilient and ultimately improved compared to 2022 and 2023, as a declining interest rate environment and improved inflationary data provided favourable conditions for debt issuers. Refinancing needs, tighter credit spreads and a desire to complete financings in advance of global elections in 2024 further contributed to the increased number and volume of debt issuances in 2024.
Reduced inflation and multiple interest rate cuts contributed to improved market conditions for debt issuers
Global debt markets experienced a prolonged period of decreased activity in 2023 and 2022, during which the Federal Reserve, European Central Bank and other international regulators took actions to rapidly tighten monetary policies in response to the largest increase in inflation rates in 40 years. In 2023, the target federal funds rate adopted by the Federal Reserve reached 5.25 to 5.5 per cent, the deposit rate adopted by the European Central Bank reached 4 per cent and the base rate in the United Kingdom reached 5.25 per cent, each representing the highest base interest rate in their respective jurisdiction in over a decade. Improved inflationary data during the end of 2023 and throughout 2024 led analysts to project that regulators would begin decreasing interest rates in 2024. This expectation came to fruition in 2024.
In September 2024, the Federal Reserve initially reduced its target federal funds rate by 50 basis points to 4.75-5 per cent, and subsequently further reduced its target federal funds rate in both November and December 2024, ending the year with a target federal funds rate of 4.25-4.50 per cent. Cumulatively, these decreases reflected a 100 basis point decrease compared to the end of 2023.
Regulators in other countries also decreased interest rates in 2024. For example, the European Central Bank decreased its policy rate four times in 2024, bringing the deposit rate down 100 basis points to 3 per cent as of December 2024, compared to 4 per cent at the end of 2023. In the United Kingdom, the Monetary Policy Committee reduced the bank rate twice in 2024, ending at 4.75 per cent as of November 2024, a 50 basis point decrease compared to 5.25 per cent at the end of 2023.
Recent actions and statements from US and international regulators have led some analysts to believe that regulators will further decrease interest rates in 2025, although the timing and significance of such decreases remain unclear and there may be fewer or smaller decreases in 2025 than in 2024. Based on current expectations regarding inflation and economic conditions, analysts in the United States project that the target federal funds rate could be reduced to between 3 per cent and 4 per cent by the end of 2025. In the most recent Federal Open Market Committee meeting held in December 2024, policy makers suggested that the market should expect an approximate 50 basis point reduction in 2025, reflecting a decrease in previous projections of a full percentage point reduction in 2025. Analysts in the European Union similarly expect additional rate cuts of up to 100 basis points in 2025, while also noting the uncertainty with respect to economic and political conditions. Analysts note that uncertainties with respect to future trends in inflationary data, economic conditions and political conditions following elections in the United States and Europe in 2024 could impact the interest rate environment.
Default outlook
Rating agencies have reported different projections with respect to default rates for 2025, depending on the sector and the timing of the applicable report. Early reports from S&P noted that the number of quarterly defaults in third quarter of 2024 reached their lowest level in two years. In 2025, S&P projects that that the 12-month trailing speculative-grade corporate default rate for Europe and the US will decrease from 4.40 per cent and 4.60 per cent in August 2024 to 4.25 per cent and 3.75 per cent by June 2025, respectively, noting, however, that default rates are expected to decline at a slower pace than they rose due to residual strain on the lowest-rated borrowers. According to Moody’s, realised default rates are projected to increase to 3.4 per cent for speculative-grade bond issuers. In Europe, Fitch projects that high-yield bond defaults may increase in 2025 as a result of escalations from stressed issuers with near-term debt maturities.
Looking ahead to 2025
Looking ahead to 2025, many analysts are projecting that the favourable market conditions in 2024 will continue to support increases in bond issuances, although with more moderate growth compared to 2024. Continued easing of monetary policies, projected refinancing needs and projected increases in M&A activity in 2025 are expected to support continued momentum in bond markets. However, analysts projecting growth in the bond markets note that more moderate interest rate declines or slower economic growth compared to projections could mitigate the otherwise favourable market environment for debt issuances.
Some analysts have expressed concerns that continued geopolitical conflicts and changing policies and administrative regimes following elections in the United States, Europe and other jurisdictions in 2024 could impact global bond markets. Of note, many analysis have expressed concern that changes in government spending, increased tariffs or other protectionist policies could impact global debt markets – with the effect being felt differently across different industries and jurisdictions. Other analysts note that changes in tax or immigration policies could have an impact on debt markets in 2025. These risks are more likely to be felt by the lowest-rated borrowers, who are more susceptible to declining market conditions, especially those that continue to feel the effects of the high-interest rate environment in recent years on their costs of borrowing.
While the impact of continued geopolitical conflicts and changing policies remains uncertain, the resiliency of global debt markets in the face of a challenging five-year period suggests that global debt markets will continue to withstand the challenges and remain a robust source of financing for issuers in 2025.
This article first appeared on Lexology | Source
