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Fitch: U.S. Financial Bond Issuance Slows; Yields Decline

August 18, 2016, 07:14 AM
Filed Under: Industry News
Related: BDC, Fitch Ratings

U.S. Financial Bond issuance declined for all sectors except insurance in the first half of 2016, according to a new Fitch Ratings report. The first half of 2016 closed with net new issuance at $56 billion, annualizing to a 7% growth rate and 16% lower than the first half of 2015. Total outstanding for U.S. financial institutions was $1.6 trillion as of the close of 1H16, a 3.4% increase from the year-ago level.

"While market volatility rocked global fixed-income markets in the first half of 2106, U.S. markets exhibited less volatility. Yields have not been unaffected but managed to grind tighter, and Fitch expects bond issuance will continue to grow at a slower pace," said William Browne, Group Credit Officer, Fitch Ratings.

Banks that are subject to Dodd-Frank Act Stress Testing (DFAST) comfortably exceeded required minimums in the latest test and may shift their focus from meeting regulatory benchmarks to distributing earnings. As a result of the 2013 changes to regulatory capital requirements, preferred equity securities have increased as a percentage of banks' capital structure for banks with more than $15 billion in assets.

Unsecured debt issuance has been limited from business development companies (BDC) and supply has also been reduced by some BDCs repurchasing debt with proceeds from portfolio repayments and borrowings on lower-cost revolvers. Fitch expects that BDCs will issue debt sparingly until portfolio valuation and performance stabilize.

The lone bright spot, insurance net issuance increased 86% in 1H16 from 1H15 to $12.8 billion due to capital management measures as well as merger and acquisition activities. Low interest rates for longer may promote further refinancing activity, while DOJ health insurance antitrust efforts may dampen M&A efforts, creating a mixed outlook for future issuance.

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