Debt Capital Markets Outlook: Key Trends for 2025

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Patrick Dabiet: Welcome to the Scotiabank Market Points Podcast, I’m Patrick Dabiet, Managing Director and Co-Head of Canadian Debt Capital Markets and Government Finance. This episode is our first DCM episode of 2025, and we’re recording this on January 28^th. Today, we're going to talk about some key themes and surprises of 2024. More importantly, what we expect to be the key drivers of market activity in 2025.

Joining me today in Toronto is my colleague from New York, Fadi Attia, Managing Director and Head of U.S. Debt Syndication. Fadi, great to be with you again. Welcome back to Toronto.

Fadi Attia: Thank you, Patrick. It’s great to be back again.

PD: Well, let’s jump right in. I’ll start off with a quick recap of 2024 here in Canada, which was a record setting year for supply, where we saw $147 billion worth of new issue supply in the corporate space, beating out the COVID induced 2021 record, which frankly, I think a lot of people thought was untouchable. So, it was a remarkable year, and in many respects, it was broken down into two key segments. The pre-election cycle, where we saw a lot of borrowers front load their issuance needs to get ahead of the U.S. election and potential market volatility that was going to come on the back of that, and then I think you saw some very opportunistic supply from borrowers who saw a very attractive rate and spread environment, in specifically November, but more importantly December, which was actually an all-time record for supply in our market.

How about in the U.S. market? What did you see play out last year for new issue supply?

FA: I would say, you know, similar themes on the U.S. dollar market. So, we ended up with near record volumes, $1.55 trillion, which was 28% higher than the same period 2023, so a profound amount of issuance, and I think what sparked this is a few things.

One, issuers taking advantage of abundant amount of liquidity, de-risking deals, particularly in the first half of the year, where you do tend to see a significant amount of bonds maturing, on a general basis, and trying to anticipate also some of the risks that could develop throughout the year. And also, we had to deal with the, you know, potential election risk in the U.S. in 2024. So that’s incentivized issuers to fast track some of their funding.

I would also say that the improvement in the cost of funding was a big driver for volumes for borrowers. So not only the investor having the liquidity to fund and facilitate much of that, but also the improvement in the cost of funding, which was profound as we progressively got into a point throughout 2024 where cost of funding was close to multi-year tights. And so that certainly incentivized issuers who are focused on funding on a spread basis. That certainly incentivized issuers in periods of time where rates did dip lower, as we saw, for example, in September where rates were meaningfully lower, and I think that, from a coupon perspective, helped a lot of issuers get over the hurdle of the elevated cost of funding that played out throughout 2023.

So, a few factors, but it was very efficiently well absorbed, and it’s impressive that the market was able to facilitate it with a very limited amount of pushback. Which really does make credit stand out versus a lot of risk assets across markets.

PD: Yeah, in many respects, what you just described, we saw a lot of the similar themes emerge in Canada, but it’s really set us up well for what should be a very interesting 2025.

And before we get to the look forward in terms of what we’re anticipating, I thought it’d be worth just sharing a few points on the Canadian side, because for the record year that it was for supply, when you sort of delve beneath the surface, I think it was really notable for a few points.

You saw a record number of discrete issuers in our market, so the number of individual companies that are raising money was an all-time record. We saw the most number of new debt IPOs as well in our market, so new entrants hitting the market. A big component of that was in the high-yield market, which was nascent effectively for all of 2023, had a record year in terms of number of issues, and there was nine new high yield issuers in our Canadian market, which I think is quite notable. So, there’s a number of things beneath the surface that were even more impressive on the Canadian side.

Maybe flipping the script back to the look forward. So, we’re starting the year again, we’re recording this end of January, and I think we’ve seen a little bit of a lens into how the market’s playing out this far. But what are you looking forward to in 2025 from a supply perspective and I’d like to get your thoughts on some of those key drivers that are going to be underneath that issuance.

FA: So, we’re estimating 2025 to bring about $1.5 trillion. So, similar to last year in terms of new issues. What’s going to drive this is $1.8 trillion of maturities coming due in 2025 and 2026 combined.

PD: Right.

FA: So, a lot of this is basically the COVID era bonds, which are low coupon bonds, but you know, certainly will be addressed as we progress throughout this year.

I do think M&A is going to be a big driver for volume. M&A last year ended up at $210 billion, which is about 14% of investment grade. We do think that M&A is going to be in a big increase this year just as a function of deregulation, function of access to capital, and the efficiency of funding a lot of the M&A through the debt markets. I do think M&A is going to increase and that’s going to add volume to our market. We’re estimating that to be close to $250 billion, which would be about 18%.

I also think the composition of the maturities will be a little bit different than last year, for corporate issuers, meaning that last year, the rate curve was very flat. This year, after the Fed’s gone through 100 basis points of rate cuts since September of 2024, the rate curve has put on a steepener, a bear steepener, where the long end of the curve has increased. That can have implications on how much supply we may see from corporate borrowers in a 30-year segment of the market. It already started to decrease in 2024, and that could continue to be the case if it remains elevated throughout 2025.

PD: And I think you’re even seeing that play out in terms of inversion on credit curves for 10s/30s so far this year. So, I think that’s notable.

Yeah, I think in many respects, there’s a few parallels in Canada. I think the record maturities that you’re referring to, COVID induced issuance, a lot of these are coming due in Canada.

So, it’s actually a record maturity year in Canada, we’ve got $101 billion worth of maturities this year. So, to your point, those are naturally going to need to be refinanced, it’s a question as to when though. And I think when you think about the coupons of some of those maturities, about 75% of them have a 4% coupon. And so, in today’s rate and spread context, I would still consider those to be very attractive, and so perhaps you’re not going to see those borrowers rush to the market as what you were seeing maybe last year.

I don’t think you have the same calendar dynamics this year that we did last year as well. There’s no main event that people have circled at some point throughout 2025 that they’re going to be pre-funding or trying to actively avoid at least for now. So, that’s going to be a little bit of a change.

But I would suggest among the corporate sectors, we’re expecting a fairly broad-based amount of issuance across a variety of sectors, and I think that there’s probably going to be some unique dynamics within some of those sectors where perhaps you see a little bit more focus on helping supporting rating. So maybe hybrids, or junior subordinated notes, become a little bit more in focus.

FA: Yes.

PD: We’re going to talk a little bit about currency as well, but I think what was key last year was a few more Canadian corporates hitting the U.S. market, actively seeking the markets that have the most compelling cost of funds. So, perhaps we see a little bit of that as well this year.

Very curious to see how the balance of 2025 plays out, but we’re anticipating another active year here in Canada.

FA: I think you raise a lot of good points, Patrick, and I think for corporate borrowers looking across different markets, that’s going to be a theme. Just simply because of the divergence of rates across a variety of different economies, and also the competitive nature of funding costs, which is varying, and we’re seeing that evolve in a much more transparent manner so far this year, and in the back end of last year, but certainly so far this year, whereby Canadian borrowers having advantages in funding in U.S. dollars. U.S. issuers, and Yankee issuers in general, having the ability to fund in Canadian dollar in a more efficient manner for various sort of dynamics or delivering that.

I think that’s going to be a theme that issuers this year will utilize more frequently just given the disparity of funding alternatives that is playing out across different jurisdictions. What do you think the biggest sort of theme in the Canadian dollar market is likely to be this year, Patrick?

PD: Yeah, so I think you’re talking about cross-border flows, and ironically, we are looking at a fairly material development for our market in that Maple, so non-Canadian domiciled issuers, issuing in Canadian dollars, is now eligible for the broad corporate index in our market, and this is a quite a material development. Historically, this was not the case. And so, I think that there’s a lot of eyes from issuers and investors alike, and how this is going to change the dynamic in the market. And so, we’re anticipating a relatively robust year for Maple issuance across financials and corporates.

That being said, I think the pace of supply within the sector, I think we’re a little bit more temperate in terms of our expectations, but I think long term, this is a fairly material development. I think why we’re, our expectations are a little bit more tempered right now is in large part due to the pricing discrepancy for a lot of borrowers who called the U.S. their home market where the conditions are exceptionally robust, where spreads are at 20-year tights, as you were pointing out. So, we’re a little bit, I would say, we’re optimistic, but we’re again, measured in terms of the level of supply we’re likely to see.

I think just to delve into why that differential exists, and I think the Bank of Canada has been on a much different rate path than the Fed. You mentioned 100 basis points of cuts that you’ve seen from the Fed, the Bank of Canada has been much more aggressive. And so, when you think about the rate discrepancy between Government of Canada’s and Treasury’s, it's roughly 130 basis points right now, and it’s been hovering in that range for some time.

And so, what that means is that spreads, absolute spreads in the U.S. market, have the ability and capacity to be significantly tighter than here in Canada, where we are much lower on absolute rates for the risk-free rate. And so, that’s a material bridge for us to cross in terms of getting closer in convergence in terms of spreads.

But that’s probably the biggest reason why we’re not seeing those swap equivalents line up right now. But I think that there’s no question that there will be more investors that will be inclined to look at these new names potentially, repeat borrowers in our market in index eligible form. So, we’re quite enthused about that.

FA: Yeah, and I’m very, I’m going to be very focused on this as the year plays out, just simply because there’s many variables which can change and re-rack this setup frequently throughout 2025.

The Fed took a certain course that was defined at the end of last year, which changed again at the beginning of this year, where the market now is pricing less rate cuts in the U.S. Does that change again as the new economic agenda for the U.S. administration gets laid out? Does that change again if inflation becomes more persistent and what implications will that have on funding? And how does that sort of seep through, particularly on the back of also fiscal deficits, which need to be addressed at some point, across a number of different economies, including in Canada and the U.S. and Europe.

But it does feel like this is going to be a segment of the market which will be very dynamic and very evolving depending on how rates behave over time.

PD: Alright, let’s shift gears a little bit, Fadi. Let’s talk a little bit about investors and how we think that they’re going to be approaching the market. And again, we have a small sample size thus far in January. What are we looking out for from the investor base? How are we going to see the new issues that are hitting the market received by the investor base?

FA: So, I think, I think the approach from the investor side will be pretty balanced this year. The entry point at the beginning of this year is a lot tighter from a spread perspective than it was in January of 2024. And certainly 2024 delivered a robust year in terms of returns for many investors. But at the current valuations, a number of investors are questioning whether or not this magnitude of returns could be replicated in 2025.

The investor base will have two ways of thinking about valuations. You have a number of investors who think about spreads, these are total return investors, mutual funds who are focused on spreads, and does the investment that they’re making deliver a return on the basis of spreads continually tightening throughout this year. I think that buyer base is more skeptical. Don’t necessarily take the view that we’re necessarily in a path where things will go wider, meet materially from this point onwards, but certainly the upside in terms of performance on spread could be a little bit more contained than what we’ve experienced in 2024.

And then the other component of our buyer base in the U.S. is the long-term investors, such as the insurance companies, the pension funds, who are looking for coupons to be able to match their assets versus their liabilities. And this investor base is going to be consistent because they’re less focused on spread, but much more focused on coupons.

And as you look at the investment grade index in the U.S., as an example, 5.5% on an investment grade index is an exceptionally attractive return for these investors versus what they have been accustomed to receiving over the bulk of the last decade.

PD: Absolutely.

FA: I think the other driver this year on the investor side is going to be motivated by relative value, meaning that we’re going to go through an economy where there’s going to be winners and losers in the U.S. and globally. Some sectors may come under pressure, for a variety of different reasons and could be driven by economic policy, could be driven by tariffs, could be driven by restriction on immigration.

And other segments of the economy in the U.S. are going to continue to flourish and expand and grow. And I do think investors will be taking a much more disciplined approach in terms of where they see the relative value and where they see potentially the upside from their standpoint, and so, I do think that distinction will happen.

PD: Yeah, I think you bring up excellent points there as it relates to relative value, as well as that dichotomy between spread focused investors and then the all-in rate focused investors as well.

I think just from my perspective, I think what will be a key driver, I think we saw this play out last year, are the technicals.

So, supply versus demand and those cash inflows. And to your point, we’ve had robust returns for the last two consecutive years, perhaps a little bit more skepticism as to what those returns will look like in 2025 just based on the start point. But I think ultimately there’s going to be a record number of maturities, which again, need to be refinanced, but in addition to that, it’s going to be a record year for coupons in Canada.

There’s going to be north of $40 billion worth of maturities that are going to be paid back into the hands of investors. The historical run rate would be around $20 to $25 billion just for order of magnitude purposes. So that’s not going to be insignificant, and frankly, those investors are going to have to find a home.

And so, while there might be a little bit more discipline as it relates to valuations for some investors, there’s also going to be the challenge of needing to make sure that you find a home for that cash that you have to deploy. So, I assume that’s the same case in the U.S. market, where you’re going to see a similar dynamic there.

FA: No, that’s a great point. It is certainly a dynamic that’s playing out in the U.S.

I think it’s also a function of valuation is not necessarily just within the credit market, but also valuations across other risk assets. As you look at equities, are equities heading a point where potential further upside is going to be capped? And is this a valuation point for reallocation of assets into fixed income, particularly the pension funds? And some of the insurance money. I think that’s an important sort of distinction that continues to keep money sticky in the fixed income markets.

And I think the other thing too that investors are displaying a significant amount of interest in is their willingness to take on more risk, meaning that investors are a lot more open to investing in a very robust manner into subordinated securities in the financial space for banks, or hybrid securities in the corporate space as they facilitate that relative value argument in that the senior curve funding spread has come in a long way over the past 12 months, and they’re looking for an ability to enhance those returns as investors by dipping their hands into the subordinated stack of the company’s capital structure.

PD: Absolutely.

I think just one more point for investors in Canada, and it’s a bit of a counter argument to everyone that is suggesting that spreads are too tight, but I think the other element to that is there’s still a healthy embedded cushion, if you will, in terms of where valuations are in Canada relative to across the globe and that Canadian spreads had been trading back of other currencies for quite some time. So, I think it’s going to be a push and pull, I think to your point, across a number of factors for investors as they make their way through 2025. And I think the early sample set again does highlight that there’s probably going to be a little bit more discretion, a little bit more discipline as it relates to how far investors are willing to chase certain opportunities. But there’s going to be a pivot point where they’re going to have to maybe bite the bullet, so to speak, and still invest despite maybe challenging conditions globally.

FA: Yeah, and I think that creates a lot of opportunities for issuers because, you know, that gives them a number of options to be able to access capital through different formats, up and down the capital stack, across the maturity stack.

And also, we’re seeing a resurgence of floating rate note issuance in the U.S., which is counterintuitive, particularly if you think about the rate trajectory that the market is currently pricing in that rates are supposed to come down. The Fed is cutting rates and has started to cut rates. But you are seeing more and more money go into floating rate note instruments, which is creating optionality for issuers to change the mix of funding that they are putting on their balance sheet from being predominantly fixed, which is what we've experienced throughout 2023 and 2024, to now a deeper market that allows them to take on more floating debt to the extent that that’s the mix that they’re looking to achieve.

PD: Yeah, excellent point.

Okay, so let’s talk about if you’re an issuer navigating all these points that we’ve raised, looking forward to 2025, what’s the key message that you want to deliver, Fadi?

FA: The key message is to be nimble, to be flexible, and to continue to foster different buyers in a variety of different markets, and I’ll unpack this in a little bit more detail.

Being nimble, meaning we do think the execution windows this year could be a lot smaller just simply because of the pronounced volatility that the market may have to work its way through it and certainly could be a theme that will experience during the first half of 2025. And that allows for smaller windows of execution. And issuers who are able to move and act quickly will be better served in being able to capture those windows that deliver strong execution for themselves. I think that’s going to be a very important theme this year, and it’s something that we continue to advise our clients to think very hard about.

The other piece is that, to your point earlier, different markets are behaving in different ways across the globe. And those opportunities are going to come and go. Whether it’s access to a different buyer base, whether it’s access to better funding on a cross-currency basis or an absolute basis, borrowers would be very well served to foster and continue to develop their access to these different markets so they’re able to effectively arbitrage that demand to the extent that they’re able to do so. And not every issuer is going to be able to necessarily do this efficiently, but certainly the bigger issuers who have access to different markets globally, would be very well served to approach it in that way.

PD: I couldn’t agree more, Fadi. I mean, I think. We have been accustomed to expect the unexpected so far going through 2025. And I think just giving yourself as much optionality, whether it be marketing in currencies that you haven’t in the past, even though you haven’t needed them, but they may offer an opportunity at some point this year, where it might be compelling to look at that. And having the ability to tap into that market or that investor base, I think it’s going to be a critical arrow in any borrower’s quiver, so why not take that opportunity? Give yourself as many outs and routes as possible to raise your capital program as efficiently as possible.

I think the other element, I couldn’t agree more as well, as it relates to the windows. I think we’ve already seen that play out. We’ve already experienced narrower windows. More and more economic releases are becoming much more important focal points as it relates to the path of rates. And so, if you are a coupon focused issuer, who you’re not only solving for spread, but also the all-in rate, it’s really hard to control both of those variables. So, giving yourself as much flexibility to that end as possible is going to be an important input.

And then I think just finally is maybe not pricing every transaction for perfection or not expecting perfection. You know, I think a ten out of ten, we’re all striving for that but, you know, a nine and a half out of ten is still an exceptional outcome.

FA: Yeah, that makes a lot of sense. And I think it’s something that will be tracked very closely throughout this year.

And I would say that we get this question a lot from a variety of different borrowers, you know, where do we think rates are going to go? Are they going to go higher? Are they going to go lower? And I think getting into the business of forecasting rates has become harder and harder just simply because there are too many factors that are impacting it. And so, our advice to issuers would be, don’t focus too much on trying to forecast where rates are heading, but really sort of intrinsically value the market that’s presented itself to you, as far as being good enough from an execution standpoint, versus what it may look like if you were to wait three, or five, or eight months down the line, because we are going to be operating in a world where the ability to forecast and take a strong view on rates, or spread for that matter, but mostly rates, is going to get a lot more challenging.

PD: Very well said.

Fadi, thanks again for joining me. Thanks for coming up to Toronto to do this in person. It’s been great to share insights, and I think we’ve got a lot to look forward to in 2025.

FA: It’s an absolute pleasure. Thanks for having me, and I look forward to the next one.

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