There are growing signs that capital markets activity will increase in 2024, according to leaders from Goldman Sachs Global Banking & Markets. Investors’ increasing conviction that the US economy will avoid recession, and that the Federal Reserve and other central banks will start cutting interest rates, could boost IPO activity and corporate debt issuance in the year ahead. A key question in the coming months is the extent of acquisition activity and whether there will be a pick-up in transactions by private-equity financial sponsors.
Equity capital markets: The pipeline is growing
“The Fed’s shift, and that of global central banks, will be a positive tailwind for the full suite of equity capital markets,” says Elizabeth Reed, global head of the Equity Syndicate Desk. “We want to emphasize that the equity capital markets are open, and importantly, the shift in investor engagement has rapidly improved as the macro has stabilized.”
Global equity issuance totalled about $400 billion in 2023, an increase of roughly 30% from 2022. Still, that remains about a third below the average volume seen across 2018 and 2019. “Equity capital markets continue to heal,” Reed says.
The pipeline of IPOs is now growing, she says. Companies that contemplated an offering in 2023 but found that valuations didn’t align with their objectives are still waiting in the wings, and Reed expects pricing to improve in 2024. While IPOs in recent years have priced at a higher file/offer discount than historical averages, Reed anticipates that discounts will recover.
“The beginning stage of the IPO reopening is going to have the flight-to-quality bias,” she says. Reed anticipates that the breadth of companies looking to IPO will increase in the second and third quarters.
She also projects that there will be increasing activity from financial sponsors and venture capital firms aiming to monetize their portfolios. Meanwhile, she says convertible bond offerings have become “incredibly attractive” for companies to pursue, so it’s no surprise that global volume doubled in 2023 as compared to 2022. More than $200 billion of convertible debt matures between 2024 and 2026, indicating a need for refinancing of that paper.
High-yield bonds and leveraged loans: M&A is the key question
Just about every index of high-yield bonds and speculative-grade loans is showing signs of growing investor confidence this year, says Christina Minnis, head of Global Credit Finance and head of Global Acquisition Finance. She adds that while defaults rose modestly in 2023, there’s a general sense that many investment portfolios are in a good place.
For now, the pipeline for sub-investment-grade offerings is full of re-pricings and plans to amend and extend existing loans, as companies and investors continue to digest the rapid rise in interest rates. Minnis expects those types of deals to predominate in the first quarter.
The key question is whether mergers and acquisitions increase.
Minnis says her colleagues in the M&A teams have noted a backlog of transactions as well as growing confidence among CEOs. This suggests that M&A activity could become more robust starting in the middle of the year.
Minnis points out that there’s been a rebirth in demand for riskier, CCC rated company debt. “The high yield and loan market ended last year up significantly,” she says.
Financial sponsors, meanwhile, have been relatively quiet for the last 18 months. Yet their need to return capital to limited partners and raise new funds will likely pressure these institutions to make transactions. “There is a lot of pent-up need,” Minnis says.
And importantly, with over 40% of bonds in the CCC rated universe now trading at yields of less than of 10%, the cost of capital is much more reasonable than it was last year. “Sellers and buyers are having a much more traditional meeting of the minds,” Minnis says.
Investment-grade corporate bonds: Issuance is expected in advance of the US election
“The investment grade corporate bond markets are incredibly resilient,” says Eric Jordan, co-head of Global Investment Grade Capital Markets. He notes that at the end of 2023, not only did Treasury yields fall significantly, but corporate bond spreads (the additional yield investors demand to own a risk asset instead of a risk-free Treasury) fell back toward multi-decade lows.
Jordan expects the US investment grade market to see $1.3 trillion of issuance this year, about the same as last year. However, he says borrowers are likely to shift bond sales to the earlier part of 2024 to avoid uncertainties that could emerge around the US election in November.
The yield curve will be an important consideration in the coming months. Jordan notes that only 16% of US-dollar issuance in 2023 had a maturity of 20 years or longer, compared with 25% of issuance in recent years when yields were lower.
For now, offerings will probably be predominantly for refinancing, and he expects an increase in financing for acquisitions (rather than for capital expenditures). New capital regulation could spur additional offerings from the financial sector.
“We are seeing a rush for folks getting ready to issue,” Jordan says. He points out that high yields on cash make it attractive to raise funds sooner than later, since funds raised from a bond offering can generate relatively high yields while the company is waiting to deploy the money.
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