H1 2024 saw a significant rise in debt capital markets issuance. European corporate bond issuance totalled €416bn, a 68% increase compared to H1 2023. This surge can be attributed to several key factors:
- Peak Rates: After an aggressive interest rate hiking cycle, rates have started to decline from their peak, reducing the cost of new debt issuance and encouraging borrowers back to the market. Some borrowers who have not had an urgent requirement to refinance postponed issuing new debt until rates started to fall.
- Tight Credit Spreads: Credit spreads remain at or near historic lows, reflecting a demand/supply
imbalance. Despite the increase in issuance. Investors are eager to lock in current yields before central bank rate cuts, demonstrated by net inflows into investment-grade credit funds being positive every week this year except one, leading to strong demand and keeping a lid on credit spreads. Markets have consistently overlooked the geopolitical and economic turmoil of 2024, which might have otherwise caused spreads to increase. - Compressed Year: Concerns about potential volatility and uncertainty due to the upcoming US election in November have prompted corporates to accelerate issuance into the first half of the year. In the investment grade bond market, it is estimated that 75% of the expected 2024 financing has already been issued, compared to the typical 50% seen by mid-year.
- Growth of Private Credit: The growth of the private credit market continued in H1 2024, with a number of fund managers raising large funds targeting private credit strategies. These include Goldman Sachs Asset Management raising $13.1bn for its fifth and largest senior direct-lending fund, Wes Street Loan Partners V. Ares Management closed a record-breaking $34bn private credit fund, the largest ever raised.
Private credit has been a growing asset class since the early 2010s, with accelerated growth in the past three years. The growth of private credit was initially focused on the leveraged finance markets as traditional banks retreated from this space due to increased regulation, however, it is increasingly moving into investment grade and real asset markets. For investors, private credit offers what were the equity returns of two years ago in the previous rate environment, but for a lower risk position in the capital stack and usually with a running yield on their investment. Despite the overall increase in commitments, investors remain underweight relative to their targets. The private credit market, currently at $1.7T, is expected to reach $2.8T by 2028.
For borrowers, private credit offers a more flexible alternative to public markets and bank lending, in exchange for a modest price premium. - UK Pension Market Reforms: Last year, the UK Chancellor announced the Mansion House Reforms, including an agreement between nine of the UK’s largest defined contribution pension providers to commit 5% of AUM to unlisted equities by 2030. New Chancellor Rachel Reeves recently met with the large Canadian pension schemes to learn from their model. These schemes are more focused on private markets; for example, the Ontario Teachers’ Pension Plan has only 7% of its assets in listed equities, compared to 60% for traditional UK pension funds.
- Booming Risk Transfer Market: Pension Risk Transfer market continues to grow, with both UK and US markets on track for their biggest-ever years. The market across the UK and the US is forecast to exceed £250bn in the next 3 years, with a significant increase in the number of large pension plans seeking a risk transfer as deficits are reduced, given the rise in rates and a desire to transfer before rates fall again. This comes as the transfer market for smaller schemes also continues to grow, with the number of transactions below £100m doubling from 2020 to 2023.
Sector Focus
Social Housing
The increase in interest rates has made housing associations hesitant to lock in long-term debt capital markets funding, with housing associations some of the longest-dated issuers in the market and therefore extremely sensitive to rates. Despite strong investor demand for long-dated paper offering attractive spreads in the 15+ year range, borrowers have shown a preference for short-dated facilities, leading to a surge in shorter-dated bank borrowing. The number of debt capital markets deals in H1 2024 was down 25% (39 vs 52 the previous year), however, the overall deal value of £4.1bn was broadly flat due to several large deals, such as Places for People’s ‘biggest ever’ £500m bond.
Strong investor demand for social housing debt has resulted in greater flexibility and creativity in debt capital markets offerings, including more flexibility on charging property security, floating-to-fixed structures, and shelf facilities. With long-term rates reducing, longer-dated, covenant-light debt capital market borrowings can represent good value. From our discussions with book-runners and recent transaction precedents, it appears there is a negligible premium for sub-benchmark issuance in the public bond market – representing an interesting alternative to private placements or bank financing. There is also a strong investor appetite for floating-rate and inflation-linked private placements, offering diverse structuring options for borrowers. Centrus was named the leading arranging of social housing transactions in the year to March 2024*. Some examples of the transactions we arranged are shown below:
- Advised Tai Tarian on raising £95m of new bank and capital markets funding to enable full refinance of existing debt
- Arranged Anchor’s first £150m shelf facility
- Advised Welsh Housing Partnership 2 on a new £38m Private Placement and £30m Government Loan saving £2m per annum
- Advised Jigsaw on £803m of new / restructured bank and Private Placement funding, a £50m PP and MRI covenant removals
Real Estate
The real estate market has been particularly impacted by rising interest rates, putting pressure on serviceability and valuations, combined with changing occupier demands in a post-COVID world. Lenders have responded with more creative approaches to debt structuring to meet serviceability requirements and some have softened serviceability covenants to adapt to the new rate environment.
While public issuance was very limited in H1, it did see the return of strong names to the market:
- Vonovia sold an €850 million 2034 social bond that landed 40bps inside IPT at +170bps (4.25% coupon), despite announcing a €6.76 billion loss for 2023 only a week earlier. Suggesting capital markets are back open to strong names.
- Aroundtown completed their first issuance since 2021 €650m 2029 issuance drummed up €4.35bn of orders
- P3 completed a €600m 2030 at MS+207bps (43bps tightening) with final demand of €3bn
- Logicor €500m 2029 tightened c. 40bps from MS+153bps from €2.2bn of demand
There is a strong lender appetite for living sectors such as PRS (Private Rented Sector), BTR (Build to Rent), PBSA (Purpose Built Student Accommodation), senior living, and industrial sectors, such as warehouses and last mile logistics.
Crossover real estate/infrastructure sectors, such as cold storage and data centres, have also seen strong appetite, benefiting from megatrends like energy transition, digitisation, and changing consumer behaviours. Centrus’ Corporate Advisory team comprises both real estate and infrastructure professionals who are able to leverage lending appetite across both markets to secure the optimal financing terms for assets in crossover sectors.
Centrus recently advised Peel on £45m NRE financing, a real estate business focused on assets linked to low-carbon energy generation. Please click here for more information.
Infrastructure & Renewable Energy
Infrastructure has remained a bright spot and we’ve seen an increase in the overall value of transactions. Despite the volatility of the past two years, infrastructure fundamentals remain strong, particularly projects with inflation pass-through mechanisms. The demand for inflation-linked debt is strong, with limited supply driving borrower-friendly pricing.
Thames Water has frequently been in the headlines recently and was downgraded to junk status by Moody’s and S&P. Despite this volatility, the UK water sector managed to close several important transactions in July, alleviating fears of contagion risk. Severn Trent and South West Water both issued 14-year and 16-year bonds, respectively. These transactions demonstrate that the UK water sector remains open for business, with liquidity available for UK water companies in public debt markets.
Despite the value of deals being down in 2024, there is a strong appetite for renewable projects amongst lenders, with banks being highly competitive, offering tight pricing and long tenors, although the volume of renewable transactions is down year on year. Local banks have proven to be the most competitive, especially for standard solar, wind, and battery energy storage system (BESS) projects. We have seen an increased acceptance of merchant risk from banks with structures including merchant tails of increasing length with appropriate structural mitigants. We have seen increased competition from private capital who are able to offer longer tenors and accept more merchant risk which can be attractive to borrowers given current PPA terms. With power prices down from their peak and rates up, the leverage available has reduced.
Battery storage continues to be an interesting sector and we have seen significant activity in EV charging infrastructure. The first few large deals in these areas have been seen in H1 2024:
- Antin-backed Powerdot raised €165m from 6 banks to finance its EV infrastructure roll-out in Portugal
- Zunder has raised €225m to deploy over 3,000 charging points in Spain, France, Italy and Portugal
- Cespa has been granted €150m by the European Investment Bank (EIB) to support the rollout of its charging network.
Centrus has advised and arranged on 15 debt transactions across real assets in H1 2024 with a total value of £1.5bn (Credentials – Centrus (centrusfinancial.com)).
For more information on Centrus debt advisory and capital raising services across real asset sectors, please contact Maria Goroh or Scott Douglas Corporate Debt & Private Capital Advisory Services (centrusfinancial.com).
*socialhousing.co.uk professional deal league table March 2023 – March 2024.
