Despite stable supply levels over the past few years, the mix by sector and tenor has changed tints. Indeed, we saw significant bank issuance last year driven by the U.S. money center banks —the most significant supply surprise of 2022. For context, Financials made up more than half of the total 2022 new issue volume (52%) — the most in 15 years. Financials saw nearly a 10% higher annual volume, while Non-Financials saw supply 25% lower. Because of this mix shift last year, we expect the seesaw to tilt the other way as supply from the money center banks contracts.
Because the Big-6 Banks* had such a borrowing binge last year, another feasting feat like that seems unlikely. The largest banks came to market in size last year because they were flush with deposits and sought funding before rate hikes and any market volatility. The money center banks will remain active issuers this year, likely with a lighter cadence. One area that stands to see higher issuance is the regional banks. They have impending maturities and face deposit pressures, plus proposed total loss absorbing capacity (TLAC) rules for larger regionals adding to supply needs. Rounding out the financial forecast, we expect insurance and Yankee bank supply near 2022 levels. Overall, we see Financials comprising half of the total 2023 supply figure, or roughly $600 billion.
The key difference between this year and last is the higher cost of borrowing that companies face after Fed hiking. For industrial supply implications, we think that Industrials will make up a little less than half of total gross issuance. We expect Consumer Non-Cyclicals to account for the largest volume from Industrials, driven by Pharmaceuticals and Food & Beverage, with the former having the most maturities. After factoring in higher redemptions, net Industrial issuance could shake out around $300 billion. This year, corporate borrowers will have to contend with higher fixed rate funding costs as they consider near-term liquidity needs, which could dampen total supply.
In 2022, many M&A deals got announced but did not fund. With yields now higher, Industrial and Utility supply may be lower, but M&A issuance should surpass last year’s $120 billion. To that end, the corporate debt M&A backlog stands at nearly $180 billion. However, economic headwinds could cool any plans for M&A-related issuance. Another factor to consider is that U.S.-domiciled issuers did not fund much in non-USD markets last year. If that reverses, higher reverse-Yankee issuance could lower total U.S. IG issuance.
Elevated funding over the past five years has made the largest debt issuers even larger. Indeed, 60% of the top 50 corporate issuers in the index have raised leverage. However, last year bucked that trend; issuers increased leverage by a mere ~0.3X (excluding Boeing). With funding costs rising from historic lows, that increase in leverage is almost negligible when compared to the 1.3x increase in 2021.
Utility supply has scaled back below $100 billion in recent years, and we expect that trend to continue. With redemptions of $100 billion this year, net issuance may be flat. We expect the pipeline subsector to be the largest Utility subsector. The one swing factor is that Utilities may seek new debt to fund grid improvements and green transitions. Focused on clean energy, Utilities will likely issue ESG bonds. Last year, they issued 22 ESG deals totaling $14 billion.
In summary, we expect herd mentality to mark 2023 issuance patterns as narrow market windows offer favorable times to bring debt. We foresee that higher funding costs, higher redemptions, and lower bank supply will lead to lower net issuance, offset in part by higher M&A debt deals. We believe this scenario will lead to a positive technical tailwind in the IG market if bond supply falls short of buyer demand.
*Big-6 Banks refers to JP Morgan Chase, Bank of America, Citigroup, Morgan Stanley, Goldman Sachs, and Wells Fargo.