The investment-grade primary is quiet this Friday, as the market continues to mull the Federal Reserve’s more dovish stance.
It is clear that new opportunities will now present themselves to issuers and investors. While a flood of new issuance is not expected, there could be a few more M&A offerings on the margins and more refinancings as part of liability management, thanks to continued low rates.nL1N2180ZA
As for current supply, this week saw US$21.550bn of volume, the bulk of which were FIGs, according to IFR data. Monthly issuance stands at US$88.125bn and year-to-date volume totals US$299.593bn.
And as the deals keep flowing, investors keep buying.
For the week ended March 20, Lipper US Fund Flows reported that the investment-grade funds net inflow was US$5.135bn and the high-yield funds net inflow was US$1.796bn
HIGH GRADE
US syndicate desks are expecting US$15bn-$25bn in supply next week, with some bankers expecting a slight skew to industrial names.
Much of this week’s supply - roughly 71% of the US$21.55bn total - was from FIG issuers. Included in that were a number of Yankee trades and three Additional Tier 1 bonds from BNP Paribas, Barclays and Nordea.
One reason we’ve seen a few AT1 trades in quick succession is that issuers are looking to get ahead of deals that are coming up to their first call dates this year. nL8N2186R1
“Issuers tend to be more aggressive in doing AT1 earlier in the year, as they don’t want to be in a position where the market knows they have to do a deal. It’s worth a bit of negative carry,” said one syndicate banker.
In all, the credit market feels in good shape, the banker said. A more dovish than expected Fed this week has been welcomed by the credit market.
“People want to see rate stability. So it’s helpful to know how the Fed sees the rest of the year. Equity investors might be more worried about growth than fixed-income investors.”
HIGH YIELD
As many as four potential deals are due to price in the high-yield market on Friday - including an acquisition financing for plastics company Neon Holdings that saw a number of covenant changes announced on Friday.
Other possible pricings could come from energy company Kodiak Gas Services, financial Freedom Mortgage and industrial company Allison Transmission.
They round out a week driven by a mix of refinancing and acquisition trades.
ADT was one of the highlights. It raised US$1.5bn on Thursday from two tranches of secured bonds, but it dropped an unsecured offering. It ties in with a trend of late that has seen investors opt for higher quality secured paper.nL1N2171N4
One investor told IFR the yield on the US$1.25bn eight-year non-call three year unsecured tranche - which was whispered at 7.5% - wasn’t high enough for some buyside accounts.
“People were asking for a yield closer to 8%,” said the investor.
“They didn’t think the differential between that and the secured bonds was large enough, and there was some comparison with the Power Solutions trade.”
The secured bonds for the Power Solutions buyout priced Monday at a yield of 6.25%, while the unsecured bonds priced at 8.5% for a differential of 225bp. The differential between the secured and unsecured bonds on the ADT deal, based on initial whispers, was more like 150-175bp, the investor said.
STRUCTURED FINANCE
An RMBS credit risk transfer deal was priced by PennyMac Mortgage Investment Trust on Wednesday while guidance emerged for Starwood Mortgage Trust’s latest non-QM RMBS deal.
Morgan Stanley, Bank of America Merrill Lynch and Wells Fargo also launched a new conduit CMBS deal, BANK 2019-BNK17, with the senior Triple-As expected at 84bp over swaps.
Lone Star meanwhile is premarketing a new US$377m non-QM deal, COLT 2019-2. The deal is being led by Credit Suisse and Nomura and is expected to be priced next week.
The execution of new deals this week has demonstrated strong levels of investor demand, which could be fueled further by Wednesday’s dovish Fed statement.
While this is likely to encourage risk appetite, investors will have to weigh this against the growing concern over the economy.
“The market has to price in more concern around the growth picture, which is negative for risk, but you also don’t want to fight the Fed,” said Dave Goodson, head of securitized credit at Voya Investment Management.
“When I net those factors out, I think this will be modestly positive for risk appetite, but we need to be choosy about where we invest.”
LATAM
Intentionally or not, Brazil tapped the market at its top, as it has been in the habit of doing over the past few years, after raising US$1.5bn through a new 10-year bond just as the country’s assets take a turn for the worst.
The sovereign garnered an order book of around US$5.5bn at its peak before printing the 2029 at 98.385 with a 4.50% coupon to yield 4.7% or 215.8bp over Treasuries.
Pricing came at the tight end of guidance of 4.75% (+/-5bp) and nicely inside IPTs of 4.95% area, allowing the sovereign to lock in a lower coupon that the 4.625% 2028, which was issued early last year.
“These guys seem to have a crystal ball,” said a banker away from the deal. “They always pick a good time to go. It just so happens they hit market at the right moment.”
Indeed, Brazilian markets started turning on Thursday following the arrest of former President Michel Temer on graft allegations - a move that is seen threatening the passage of vital pension reforms.
The new 2029s were about half a point lower in early trading, while the sovereign’s five-year CDS has widened about 9bp to 170bp this morning.
The Real was also taking beating as it hit 3.88 against the US dollar this morning, its highest level since early January.
EQUITIES
The US IPO market is not one size fits all.
While Levi Strauss & Co celebrated its successful NYSE debut yesterday, Alight, the Blackstone-backed HR consultancy, bowed out of its up to US$800m IPO amid poor investor reception.
Bank of America Merrill Lynch, JP Morgan and Morgan Stanley, the joint bookrunners on the offering, presented Alight an offer US$1-$2 below the US$22-$25 range marketed on 32m shares, bankers involved in the underwriting told IFR.
Levi Strauss, in contrast, closed its first day of trading at US$22.41, a 31.8% return on the US$17 offer price.
Both deals were viewed by ECM bankers as important benchmarks for other sizeable deals in the pipeline, including Lyft’s upcoming US$2.1bn blockbuster next week.
Online textbook seller Chegg raised US$700m from the sale of a six-year convertible bond.
Morgan Stanley, Bank of America Merrill Lynch and Allen upsized deal at 0.125%, up 30%, the issuer-friendly ends of talk and an increase from the US$500m target at launch.
Brazilian airline GOL landed US$300m from the sale of a five-year convertible last night, after accelerating pricing amid strong investor demand.