Corporate fundraising cooled sharply in the first half of 2022 as a storm blowing through financial markets left bankers and corporate finance chiefs wary of issuing new equity and debt.
Companies around the world raised $4.9 billion through new bonds, loans and equity in the first half of 2022, down 25% from the $6.6 billion raised in the first half of 2021 – a record period , according to data provider Refinitiv.
The cooling in financial markets underscores a powerful shift from exuberance to apprehension this year as central banks aggressively tighten monetary policy to temper still-high inflation. Supply chain disruptions resulting from lockdowns in China have added to those pressures, as has Russia’s invasion of Ukraine, depleting raw material inventories and driving up oil prices.
The three months between April and June were an “oh my god” quarter, according to Alex Veroude, head of fixed income investment office at $1 billion asset manager Insight Investment.
“In the first quarter, we realized that rates were going up and the war in Europe was obviously bad, but for financial markets it was all pretty contained,” he said. “We probably had a lot of the same things as today, but this term we realized how connected everything was.”
The impact on financial markets has been deadly. The S&P 500 fell 16% in the second quarter that ended Thursday, leaving year-to-date losses of more than 20% and pushing the U.S. stock index into common definition bear market territory.
The junk bond market, where poorly rated companies borrow from risk-tolerant investors, posted its biggest quarterly loss since the pandemic-induced turmoil of March 2020.
Interest rate expectations have also quickly recalibrated and investors now expect the Federal Reserve’s benchmark interest rate to be around 3.5% by the end of 2022. , which would mean that the markets would end the year with the highest federal funds rate since the start of 2008.
The US central bank hopes that by raising borrowing costs it will suppress demand and thus reduce the price spike. The slowdown in capital raising is a signal that the Fed’s efforts are beginning to bear fruit.
“We had started pricing in the storm in the first quarter,” said Kevin Foley, head of global corporate debt issuance at JPMorgan Chase. “Now we’re really into it.”
Investors have, in turn, been reluctant to hand over cash. Bankers said corporate treasurers had largely halted all but absolutely necessary fundraising.
The sharp swings in financial markets this year have hit equity sales the hardest, with many companies delaying planned IPOs, including some that have privately agreed to cut their valuations.
Equity financing worldwide, from companies going public to follow-on stock offerings, convertible bonds and special purpose acquisition vehicles – the so-called Spacs – fell nearly 70% to 252 billion at the end of June, marking the smallest amount raised in the first six months of a year since 2005.
The decline was particularly notable in the United States, where total equity fundraising slumped to just over $40 billion, the least since at least 1999, and down from nearly $327 billion. dollars for the first six months of 2021.
Only 18 companies listed in the United States through traditional IPOs in the second quarter and 14 in Europe. The cold reception to Bausch & Lomb, America’s largest bond, highlighted the weak environment and discouraged other companies from following suit. Bausch raised less money than initially expected and its shares fell more than a fifth from their offer price.
“There are just too many question marks right now. [for deals to get done]”, said Lauren Hahn, managing director of equity capital markets at KKR, adding that the slowdown is unlikely to subside until inflation begins to subside. “No one knows where the bottom is. .”
Markets in Asia and the Middle East, while still weak, were significantly stronger, with successful deals in the first half, including the $11 billion IPO of LG Energy in South Korea and the $6 billion listing of the Dubai Electricity and Water Authority.
The same was true for corporate bond issues. Across Asia, corporate bond sales fell from the bumper first half of 2021, but still posted their third consecutive year of issuance of more than $1 billion.
Globally, the decline in new fundraising was concentrated in lower-rated companies, while high-quality and higher-quality issues remained more in line with their historical trend. Sales of junk bonds in the United States have fallen to less than $60 billion, from more than $250 billion in 2021 and the slowest start to the year since 2009.
” Since  financial crisis, we had very short downtimes. Greed and liquidity quickly brought the market back,” said a debt banker at a US bank. “This currency correction and the Ukraine crisis, we were hoping for it to resolve. But this dislocation is different. It’s protracted. . . I can’t point to anything that could turn it around.”