Nov 16 - Consistent with the slowdown in U.S. business activity and earnings growth in recent months, the share of investment-grade industrial bond volume downgraded in the third quarter, 1.5%, was higher than any quarter from 2010 through first-half 2012. However, despite less favorable credit trends, corporate borrowing costs continued to shrink.
The average coupon on outstanding investment-grade industrial bonds (a universe totaling $2.1 trillion in size) fell to 5.2% from 5.6% at the beginning of the year (a 5.9% decline). The average high yield coupon also fell but more modestly to 8.1% in September from 8.4% at the beginning of the year (a 2.8% drop).
Brisk new issuance activity drove the declines across both segments of the market. The average investment-grade new issuance coupon was 3% in the third quarter, while the average speculative-grade coupon was 6.8%. This was accompanied by stellar issuance of $231.8 billion, up from $176 billion in the second quarter.
‘This year marks the first time in the recovery that speculative grade borrowing costs have meaningfully contracted’ said Eric Rosenthal, Senior Director of Fitch Credit Market Research, ‘The key benefit of a favorable funding environment for these issuers to date had been the ability to push out debt maturities’.
The par-weighted average coupon of all outstanding bonds moved lower to 6.1% in the third quarter from 6.4% at the beginning of the year (drop of 4.9%).
Higher rated sectors enjoyed the biggest declines. Food, beverage, and tobacco, and transportation, for example, saw the average coupon of outstanding issues fall 12% and 9%, respectively, through September. Further down the industry rating scale, borrowing costs declined more modestly. The metals and mining sector, with a 51% high yield concentration, saw its all-in coupon drop 3%.
‘Barring any shocks to the funding markets, there is room over the coming year for corporate borrowers to reduce their interest costs even further’ said Mariarosa Verde, Managing Director of Fitch Credit Market Research. ‘The gap between new issuance coupons and the carry on existing debt is significant’.
The share of the U.S. corporate bond market affected by downgrades remained steady in the third quarter at 1.3% of outstanding volume, while the upgrade rate slipped back to 1.1% from 2% in the second quarter. There was a notable shift in downgrades away from financials and toward industrials in the recent quarter.
For a full view of U.S. corporate bond market rating and issuance trends through the third quarter please see ‘Fitch U.S. Corporate Bond Market: Third-Quarter 2012 Rating and Issuance Activity’ available at ‘www.fitchratings.com’.