- Companies this year will further trim their borrowing from the torrid pace in 2020 and likely sell $1.28 trillion in U.S.-dollar denominated investment-grade bonds, using the proceeds primarily for debt refinancing and mergers and acquisitions, according to Moody’s Analytics. Borrowing will probably shrink 20% compared with 2021.
- “M&A will be strong as businesses are flush with cash,” Moody’s said. Companies during the third quarter held $1.2 trillion in undistributed profits — a proxy for corporate savings — and a figure equal to 5% of nominal GDP, Moody’s said.
- Companies have “been in a savings mode, which bodes well for M&A this year and should help insulate firms from turbulence in financial markets,” Moody’s said. Issuance of high-yield corporate debt will probably decline 27% to $482 billion this year compared with a record $622 billion in 2021.
CFOs considering further borrowing this year need to weigh a complex array of threats to financial market and economic stability.
Fiscal stimulus this year will likely fade if President Biden fails to overcome resistance within his own party and gain passage of his $1.75 trillion Build Back Better plan. The legislation would expand social programs such as healthcare, housing and child care and intensify efforts against climate change.
The omicron variant of COVID-19 may further slow economic growth and Federal Reserve officials, citing the highest inflation since 1982, have penciled in three quarter-point increases in the benchmark interest rate this year.
Also, “markets appear to have gotten ahead of themselves and are thus vulnerable to significant corrections,” according to Moody’s Analytics Chief Economist Mark Zandi. “Stock, bond, real estate, commodity and crypto markets are frothy, bordering on speculative."
Estimates for corporate bond issuance may prove too high, Moody’s said.
“Risks are weighted to the downside and centered on interest rates,” Moody’s said. “Rates have jumped recently and investment grade-issuance, which is a longer duration, is more sensitive to interest rates.”
The yield on the 10-year Treasury note has increased to 1.75% from 1.51% on Dec. 31.
Low borrowing costs have helped fuel deals in recent years. CFOs pushed up M&A to a new high in 2021 as the economy rebounded from a pandemic shock and record monetary and fiscal stimulus pumped up liquidity.
The announced value of deals worldwide surged 64% last year to $5.9 trillion compared with $3.6 trillion in 2020, according to Refinitiv.