Costly capital markets are largely to blame for the slump in investment banking. Banks are left counting their losses
Hi Aaron Weinman here. Weak investment-banking revenues held back banks' recent earnings numbers.
A big part of the slump in dealmaking can be attributed to the corporate-credit market. It's where I cut my teeth as a reporter and thought I'd spend today unpacking what's happening there.
1. Investment-banking revenues slumped last quarter as dealmaking slowed. High-yield bond issuances are down almost 80% this year compared to this time in 2021, and investment-grade deals are down about 17% for that same period, Tom Joyce, capital markets strategist for MUFG, said during a media roundtable on Wednesday.
Market volatility, increased borrowing costs, and soaring inflation have left dealmakers hamstrung as companies avoid a more expensive public bond and loan market.
"Many of the corporations that we speak to don't need to issue debt for the next one or two years," Joyce said.
While the slowdown in deals is worrying, it's important to remember that companies made hay while the sun shined in 2020 and 2021. The Fed's decision to keep rates near zero meant that borrowers raised debt for anything from acquisitions to refinancing old debt.
So it shouldn't be a surprise that deals have slowed down, and many bankers are fretting over the security of their jobs. During the good times of lower-rate bonds and loans in 2020 and 2021, many companies were quick to raise debt that doesn't mature until 2027 or 2028.
Indeed, just $95 billion in investment-grade bonds fall due this year, and only $13 billion worth of high-yield debt, and $15 billion of leveraged loans mature this year, according to Fitch Ratings. This increases to $258 billion next year in investment grade, but maturities are less than $50 billion each in high-yield bonds and leveraged loans for the next two years.
"Companies were able to extend their runway in terms of liquidity needs," Steven Oh, the global head of credit at PineBridge Investments, told Insider. "Only those that are under significant stress might need access to the market in the coming months."
And accessing the market right now is tough. A high-yield bond that might have charged about 4% or 5% in interest is now costing some borrowers more than 10%, capital-markets bankers said.
Another pain point for these bankers is the debt they've had to hold on their balance sheets. Typically, a bank will underwrite a deal for a client and then sell that debt to institutional investors through a bond or loan. Banks marked about $1.3 billion of losses last quarter on corporate-debt commitments that are yet to be sold to investors, Bloomberg reported.
Opportunistic investors also know the ball's in their court right now and can pick this debt up on the cheap.
Take Cornerstone Building Brands. Private-equity firm Clayton, Dubilier & Rice agreed to buy the company for almost $6 billion in March. It's currently raising about $1 billion in loans and bonds to support the buyout, but the debt is being offered to investors at 90 cents on the dollar, and a yield of about 11%, a banker familiar with the transaction said.
You can also look at Elon Musk's Twitter saga. These very markets are what he would need if he were to complete his purchase of Twitter. Some $10 billion of that $44 billion deal would be raised in the corporate-credit space, but right now — whether he has to buy Twitter or not — it's no easy feat.
"Borrowers are just going to have to accept that this is the new rate of funding," Viktor Hjort, global head of credit strategy and analysts at BNP Paribas, said during a press conference at the French bank's New York offices earlier this month.
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