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Wednesday, 13 December 2017

Borrowers expected to pay up in volatile high-grade market

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Borrowers looking to issue in the investment-grade bond market this week are likely to be forced to pay bigger-than-expected new issue concessions if they try to tap a market that’s been whacked by volatility in the past three trading days.

A sharp leg wider in credit spreads on Monday slammed the brakes on primary market activity, with no new investment-grade mandates announced – all but unheard of at the start of a typical week.

But bankers are sticking to forecasts of as much as US$20bn in high-grade supply this week, even after the IG CDX 22 blew out 5bp – its biggest negative move all year – as nerves got the better of the credit markets, spooked by unprecedented scenes in Hong Kong, one of the centres of world finance.

By 13:15 New York time the index has retraced some of those losses but was still 4.25p wider at 68.125bp.

The market was already groaning under more than US$126bn in new issuance in September through Friday, when the shock resignation of Bill Gross from Pimco set off new alarm bells.

The Wall Street Journal reported that Pimco saw around US$10bn in redemptions after his departure was announced.

“If a deal needs to move forward this week, investors should be getting a great trade here because they will have the ability to say that things are definitely weaker and that they need to be compensated for that,” said one syndicate manager.

“Issuers have to be aware that they will have to be more friendly toward the investor base to get them on board a transaction.”

Among deals that had been expected to surface this week included an acquisition financing as large as US$5bn–$8bn, and other time-sensitive trades looking to get ahead of the usual earnings blackout season in October.

Any delay in issuance will only add to yet another heavy month of deals ahead, with some underwriters predicting US$70bn–$80bn for next month.

Some investors, however, believe Monday’s disruption will be short-lived.

“What you might be seeing is some people buying the (CDX) index until they find individual names to buy,” said Matt Duch, senior portfolio manager at Calvert Investments about the widening out of high-grade credit derivative index.

“I don’t think this is something to really worry about long-term. I think you will see some people putting cash to work and taking advantage of this volatility. I personally would, and have.”

New issues mixed

Investors caught off guard earlier in the year by predicting rates would rise in 2014 are also loathe to stay out of the investment grade new issue market to any major degree.

“The market in investment grade is fully valued right now but no-one wants to be that investor who makes a strong conviction that rates will be going higher soon,” said Rajeev Sharma, portfolio manager at First Investors Management Company.

“People have been saying that all year and it’s been the wrong call every time.”

He said there is still plenty of money to be put to work in this asset class.

“Pension funds are getting money in the door and they will want to take advantage of any widening in spreads,” said Sharma.

Any jump in new issue concessions, will be offset to some extent by a 10-year Treasury rate that’s now below 2.5%, at 2.486%.

Recent new issues, which were priced with some premium to ensure they did well in the after-market, were also holding up, which helped underpin investor confidence.

Sysco Corp’s 3.00% 2021s and 3.5% 2024s, which were part of a US$5bn acquisition financing trade last week, were off their tights but still above water at trading levels around new issue spread.

Roche’s 3.35% 2024s, issued last week as part of its US$5.75bn acquisition financing, was about 3.5bp tighter, trading around 78.5bp versus its 82bp launch spread.

                          RECENT NEW ISSUES TRADING LEVELS: 
    
COMPANY  
TENURELAST WEEK’S PRICINGTRADING LEVELS
    
ABBEY 3YR T+62.5bp64/62
ROCHE10YRT+82bp80/77
SYSCO 10YRT+102bp102/100
SYSCO30YR T+132bp131/128
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