Interview, Fireside Chat
A Record Year In Corporate Financing
- Goldman Sachs West Coast Financing co-head Yasmeen recapitulated the 2020 investment grade market as issuing over $1.9 trillion, representing a 50% year-over-year increase compared to 2019 and a 30% increase versus the 2017 record.
- Three primary drivers fueled this unprecedented issuance volume:
- Liquidity accumulation: Corporates prioritized maximizing cash on balance sheets to mitigate extreme uncertainty.
- Refinancing risk management: Companies actively extended near-term maturities, terming out revolver draws, and commercial paper balances to avoid liquidity traps.
- Favorable market conditions: Federal Reserve intervention reversed credit spread widening, establishing the lowest ever recorded coupons across the investment grade curve.
- For 2021, Goldman Sachs forecasts a normalization of investment grade issuance to approximately $1.3 to $1.4 trillion.
- The anticipated shift to normal levels is driven by a continuation of opportunistic refinancing, liability management activities, and a projected return of M&A financing.
- M&A financing represented only 5% of the investment grade market in 2020, significantly below the historical 15–20% range.
- Future M&A activity faces sector-specific constraints:
- Large-cap tech: Expected to encounter regulatory hurdles that may limit transformative deals.
- High-debt acquirers: Companies that utilized debt financing in prior years are currently prioritizing deleveraging goals before pursuing new debt-financed acquisitions.
- Capital allocation strategy for 2021 will likely balance share repurchases and dividends against M&A opportunities, influenced by political backdrops and regulatory expectations.
- Goldman Sachs rates the risk of widespread corporate ratings downgrades as low, citing that:
- Rating agencies are adopting forward-looking methodologies that account for the specific, temporary nature of 2020 EBITDA impacts.
- Anticipated vaccine rollout is expected to accelerate EBITDA recovery and subsequent deleveraging.
- Balance sheet de-risking has pushed out near-term maturities, reducing immediate default triggers.
- Any potential downgrades are expected to be idiosyncratic and well-telegraphed to the market in advance.
- Lasting structural changes to corporate finance are expected, specifically regarding:
- Liquidity buffers: A shift toward maintaining higher-than-minimum cash levels.
- Maturity optimization: A strategic pivot from minimizing cost of debt to eliminating refinancing risk, prioritizing "clearing the runway" against the 1% probability of severe adverse scenarios.