Only one investment-grade offering is on tap this Wednesday as the IG sector slows down for an August holiday.
Tuesday saw five deals totaling US$2.55bn, pushing weekly issuance to US$9.3bn and monthly issuance to US$73.696bn, according to IFR data. Year-to-date issuance hit US$772.784bn.
Commenting on Tuesday’s primary market, BAML said that the “average new issue concession declined to 6.4bps today from 9.0bps (on Monday), and the average break performance improved to 3.5bps tighter today from 2.8bps tighter (on Monday).”
This week’s new issues were trading 2.8bps tighter on average from pricing, BAML said.
BAML also released its 2019 Corporate Risk Management Survey, which provides insight into how repatriated earnings will be used.
“Recall that two years ago this survey showed that the predominant plan for repatriated earnings after tax reform was to pay down debt, followed by share repurchases and MA,” BAML said. “Two years later, in the second year with the new tax code, those plans still hold.”
“While many companies prior to tax reform issued debt to make up for cash being trapped abroad, since tax reform went into effect in 2018 we have indeed seen them bring down debt levels,” BAML reported.
“We expect that to continue given the survey.”
HIGH GRADE
Bond issuance has slowed to a crawl as just one issuer, IHS Markit, is out with a US$250m tap of its 4.24% 2029 bond Wednesday.
Syndicate desks have already chopped most of the wood expected for this week with supply volumes at US$9.3bn of the US$10bn anticipated on the high end.
The market still appears strong for new issuance even as fears of a recession swirl and President Donald Trump contemplates new tax cuts.
The last round of tax cuts provided a boost to corporations, especially those with overseas repatriated earnings.
A further reading of BAML’s 2019 Corporate Risk Management Survey says that corporations tracked by BAML reduced gross leverage to 2.0 times from 2.5 times, even though net leverage was increasing.
“Tracking 23 top IG issuers in terms of repatriated cash, we find they added $250bn in debt over the four years ending in 4Q17, only to reduce debt at roughly the same annual pace over the six post-tax reform quarters ended 2Q19.”
HIGH YIELD
It is another slow day in the primary markets for US high-yield corporates, but secondary levels are off to a good start with prices largely showing green this morning.
Stocks in the US look to be opening higher on strong results form retail names Lowe’s and Target, and high-yield seems to be following suit.
Teva Pharmaceuticals is the top performer, with its 2.95% 2022s up over a point at 87.75, while its 2.8% 2023s have rallied 1.5 points to hit a dollar price of 84.56, according to MarketAxess data.
The company’s share price has reportedly got a lift from positive trial results for its Ajovy migraine medicine.
Elanco Animal Health is the clear underperfomer this morning, with its 4.8% 2028s sinking close to two points to hit 108.22 after the company announced on Tuesday that it planned to buy Bayer’s veterinary medicine business for US$7.6bn.
The transaction, which will be partially financed through a combination of debt and equity, is expected to result in a material increase in leverage.
STRUCTURED FINANCE
As with other asset classes, primary activity in the structured finance market looks to be slowing as the summer doldrums set in.
Honda largely had the market to itself on Tuesday when it landed a US$1.25bn auto receivables deal, which was upsized from US$1bn.
The auto company priced a US$334m A1 class tranche with a 0.31 year average weighted life of 0.31 years at a yield of 2.06929%.
It also came with a US$465m class A2 tranche with a 1.11 average life at EDSF plus 21bp, and a US$399m class A3 tranche with an average life of 2.28 years that came at interpolated swaps plus 30bp.
Also 600 California came with a US$228m fixed-rate CMBS offering, landing a US$84.944m class A tranche with a weighted average life of 5.03 years at a yield of 2.2998% or swaps plus 93bp.
That leaves a few stragglers in the pipeline, including ABS deals from Continental Finance, LendingPoint and Napier Park. Lone Star is also readying a US$432m RMBS.
LATAM
One borrower has raised cash in Swiss francs, as the dollar LatAm primary market remains muted.
Chilean FIG Santander Chile borrowed CHF100m on Wednesday via 10 year bond that was priced at par to yield 0.135%. Deutsche Bank and Zucher Kantonalbank were leads on the deal.
Santander is the second LatAm issuer this week to access the Swiss franc market. On Tuesday, Mexico’s Banorte also raised CHF160m via a 0.450% 2023 note.
So far, the dollar market remains quiet amid continuing political and economic volatility in the US and other countries in the region, like Argentina.
Later this week, Avianca is expected to break through the summer lull as it ends its roadshow ahead of a swap of its 2020 notes.
“I’d be surprised to see anything other than Avianca before Labor Day,” said one senior syndicate banker.
EQUITIES
Cybersecurity specialist Proofpoint raised US$800m from the sale of an upsized 5 year CB, the only substantial US ECM deal so far this week.
Morgan Stanley, Bank of America Merrill Lynch, Citigroup and Wells Fargo set pricing at issuer-friendly terms including a 0.25% coupon and 37.5% conversion premium after marketing a US$750m offering at 0.25%-0.75%, up 35%-40%.
A busy convertible bond market is considered by some to be a key indicator of an overheated stock market.
Proofpoint is already the 13th CB issue this month, pushing August CB totals to US$7bn, or 28% of CB proceeds raised this year.
Proofpoint plans to use US$72.8 million of the net proceeds to pay the cost of the capped call transactions to reduce dilution from possible future conversion of the notes.
Proofpoint expects to use the remaining proceeds for general corporate purposes, possibly including acquisitions.