IFR SNAPSHOT-All quiet in the August homestretch

7 min read
John J. Doran

No IG or HY offerings are expected in the US corporate primaries this Thursday as the last days of summer beckon for holiday time.

On Wednesday just one IG deal was priced totaling US$350m, bringing weekly issuance to US$9.650bn and monthly issuance to US$74.046bn, according to IFR data. Year-to-date issuance stands at US$773.134bn, well behind the US$832.664bn sold during the same period in 2018, according to IFR.

Speaking of volumes, BAML is out with some insight as to what is driving demand and issuance in the US IG corporate market.

“There is no doubt that the big decline in US corporate yields, and strong inflows due to the near elimination of foreign IG yields, create an environment highly conducive for corporate issuance,” BAML said in a report. “However, our view is that this time - unlike a few years ago - upside risk to IG supply volumes is only modest and also relatively leverage-neutral.”

“This is because corporate behavior has changed and as a result issuance has shifted away from supporting the releveraging activity of a few years ago toward refinancing - a change we expect to last into the end of the cycle.”

BAML said it is comfortable with both IG corporate fundamentals and its original US IG issuance forecast for 2019 of US$1.187trn, or down 4% from 2018.

HIGH GRADE

The market continues to look attractive for new issuance, but with most bankers away from their desks until after Labor Day there were no deals in the market Thursday.

The 10-year US Treasury yield continues to trend up from its lows, but average credit spreads are tightening at the same time to 126bp over Treasuries, nearly erasing the widening in August, according to ICE BAML data.

And investor demand, especially from yield-starved Europe, is driving IG yields down here in the US.

However, the low yield environment has consequences as well, Citi researchers highlighted.

For example, an over abundance of long maturities will pressure credit curves steeper and the low yields may pressure companies to lever up again.

“Evidence of broad-based deleveraging remains elusive among US IG companies, despite some early high-profile successes among mega-cap Triple Bs,” Citi noted in the report.

HIGH YIELD

US high-yield markets looks set for a mixed start as markets await Fed chair Jerome Powell’s key Jackson Hole speech tomorrow.

Fears that the central bank will prove less dovish than the market wishes was weighing on asset prices and overshadowing strong results from retailers Target, Lowe’s and Nordstrom.

Spreads across the credit spectrum saw double digit tightening yesterday, though investors are erring on the side of caution and sticking to more solid names.

US junk names are putting in a mixed performance in the secondary markets, with bonds issued by Nielsen Finance, Elanco Animal Health and Altice inching lower in morning trading.

Even so, Elanco, which announced its intention to purchase Bayer’s animal health unit for US$7.6bn earlier this week, is off recent lows.

Its 4.9% 2028 was being quoted at around 108.10 this morning, down about two points over the last few days, but still higher than the low of 107.276 seen on August 20, according to MarketAxess data.

Tesla’s 5.3% 2025 bond, meanwhile, is up about a point at 90 after Moody’s changed it outlook on its B3 rating to stable from negative earlier this week.

“As Model 3 output is now in line with Moody’s earlier expectations the company should be able to achieve production efficiencies, lower costs, and strengthen automotive gross margins,” Moody’s said earlier this week.

STRUCTURED FINANCE

The primary market for structured finance issues saw another US$552m in new supply on Wednesday, clearing up much of the remaining pipeline.

Private equity firm Lone Star issued a US$432m RMBS, pricing a US$320m class A-1A tranche with a weighted average life of 1.47 years at a yield of 3.375%.

It also issued a US$75m class A-1B tranche with a 2.99 weighted average life at a yield of 4.288%.

National Funding, a fintech, offered the market a US$120m small business loan ABS via sole bookrunner Guggenheim Securities.

It priced a US$88.421m class A tranche with a weighted average life of 4.172 years at swaps plus 275bp or a yield of 4.209%.

That essentially clears much of the pipeline with just three ABS deals waiting to price this month, namely offerings from Continental Finance, LendingPoint and Napier Park.

LATAM

It is another quiet day on Thursday for issuance in LatAm primary, with no pricings or announcements expected.

The same thing cannot be said of news coming out of Argentina, which continues to dominate headlines.

Fitch downgraded 16 Argentine corporates on Wednesday following the sovereign’s three-notch downgrade to CCC late last week.

YPF, AES Argentina, Agua y Saneamientos Argentinos, Albanesi, Genneia, MSU Energy and Clisa were downgraded to CCC to mirror the new sovereign rating.

Fitch cited policy uncertainty following the August 11 primary elections which placed President Mauricio Macri behind opposing candidate Alberto Fernandez by about 15 points.

YPF’s 8.5% 2025 note was changing hands at 79.755 this morning, down around 1.19 points from yesterday’s close, according to MarketAxess data.

EQUITIES

Canadian dairy processor Saputo raised C$599m (US$450m) in a syndicated block trade and concurrent private placement.

The C$400m block consisted of a pubic offering of 10.1m shares, which priced at C$39.60, a 5% discount to last night’s C$41.70 TSX close.

Suputo shareholders Jolina Capital, a vehicle controlled by the company’s CEO Leno Saputo, and Placements Italcan agreed to purchase an additional 5.03m shares at the same price in a private placement.

Canaccord Genuity and BMO Capital Markets led the underwriting syndicate.

The offering comes as Saputo hopes to close its C$196m purchase of the specialty cheese business of Australia’s Lion Dairy & Drinks later this year.

Ximalaya FM, China’s largest online audio platform (podcasts), has picked Goldman Sachs, JP Morgan and Morgan Stanley to arrange an IPO of US$500m–US$1bn, IFR Asia reported this morning.

Ximalaya has considered listing in either Hong Kong or the US and has preliminarily decided to go for a US listing, sources said.

The company’s smaller rival Lizhi FM is also planning to raise about US$100m from a US IPO as early as this year.