After years of bingeing on debt at record-low costs, investment-grade companies are now finding that borrowing on the cheap is gradually getting harder to do.
The US high-grade market has seen seven straight years of record issuance, marked by ever-tighter spreads, huge trades and a buyside eager to do almost any borrower’s bidding.
But amid rate hikes, volatility, weaker foreign demand, a jam-packed supply calendar - and the fact that total returns are more than 2.5% negative on average this year - investors have started pushing back.
Most borrowers struggled to move the needle on pricing this week, while Campbell Soup and others didn’t manage it at all - even some utility plays that are typically an easy sell.
An unusually high number of deals meanwhile went straight to the number at guidance, including offerings from WGL Holdings and Fifth Third Bancorp.
And as the primary has seen three consecutive sessions where the average new issue concession was 9bp-10bp, syndicates have been in for something of a rude awakening.
“People got spoiled over the past couple of years with how bullish the market was,” one syndicate banker told IFR. “This is not something we’re used to seeing.”
HARD TO PREDICT
Of course many predicted that US issuance would start to slow in 2018, and they were correct.
Cash repatriation, rates hikes and other factors have all had an impact, and year-to-date volumes are running US$46.28bn behind last year’s pace. And instead of spreads tightening, as might be expected as volumes fall, they have actually widened.
Still, many thought that investors were keeping their powder dry for the much-anticipated M&A bond from pharmacy chain CVS to finance its acquisition of healthcare insurer Aetna.
And some investors were: the US$40bn trade last week attracted an eye-watering US$114.6bn of demand - the largest order book ever in the US investment-grade market.
But that has not translated into success for others.
“Many of us thought that the performance of CVS meant we might have had a little more leverage when trying to bring these (other) deals,” one banker close to the trade said.
For one thing, CVS absolutely had to get its financing done, and ended up paying to do so - as much as 18bp in concession over where comparables were trading.
Moreover, at a time when US regulators and even President Trump have not been shy about shooting mergers down, CVS laid on an extra investor-friendly redemption provision.
It sold some of the nine-tranche deal at a discount, while still undertaking to buy those bonds back at 101 if the merger doesn’t happen.
But rather than clearing the way for other borrowers, CVS may instead have emboldened investors to seek similar concessions on other trades.
“Given the amount of issuance and pricing on CVS, most investors are now asking for concessions to make sure deals perform well enough,” one buyside source said.
SENTIMENT SHIFT
Campbell Soup opted not to follow CVS’s lead, and investors fought back - Campbell did not tighten six of its seven tranches, and the 30-year actually widened.
Of course the two trades were wildly different.
For CVS, the market was abuzz with talk about the underlying vertical integration with Aetna and a new paradigm in American healthcare.
The Campbell bond was helping finance the venerable tinned soup company’s purchase of a salty snacks maker, Snyder’s-Lance, at a time when US tastes are shifting rapidly.
“As volatility has ticked up, there is more focus on how tight spreads are and the prospects for return,” said Kathleen Gaffney, director of diversified fixed income at Eaton Vance.
McDonald’s had little trouble selling a US$1.5bn trade on Wednesday that was nearly four times covered - but it still had to pay a 9bp concession on the 10-year tranche.
Meanwhile several would-be issuers stood down this week, trying to get the lay of the land before dipping their toes in the water.
“Concessions are elevated,” said yet another syndicate banker. “Performance has been poor - and more than a handful of trades haven’t got to their desired size.”