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Wednesday, 21 August 2019

IFR SNAPSHOT-What a difference a Fed makes: deals galore

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Corporate primary markets are bustling with new deals today after Federal Reserve Chairman Powell’s testimony before Congress on Wednesday reinforced market expectations of a July rate cut.

Five deals are expected to price in the high-yield primary, five deals in the Latam primary and just a mere three offerings in the IG primary, according to IFR.

BAML summed up the sentiment in a note saying a July rate cut was on and that the “Fed now appears much more willing to yield to market expectations and underwrite the US economy as insurance by easing policy, especially as they can afford doing so at little risk given the weak backdrop for inflation.”

“The combination of solid fundamentals and a super-proactive Fed is obviously very positive for IG credit spreads - and in many ways the opposite of what transpired last year,” when the Fed was raising rates.

HIGH GRADE

Three borrowers announced new bonds in the primary Thursday as the market rallies behind a dovish Fed.

The deals include a two-part trade from steel manufacturer ArcelorMittal, an 11-year non-call 10 from British financial institution Nationwide Building Society and a four-part issuance from Japanese bank Mitsubishi UFJ Financial Group.

Bonds are tightening well in early secondary trading led by the most active bonds from CVS and Cigna, which are 8bp and 7bp tighter respectively.

Deals that priced this week have experienced strong performance in the secondary including a three-part bond from Panasonic that priced Wednesday and is trading as much as 11bp tighter today.

These are the first bonds from the Japanese diversified industrial company Panasonic in at least 20 years, which provided scarcity value that helped build order books to US$10.65bn. nL8N24B5SX

Investors had concerns over Panasonic’s credit quality given its low Single A ratings are on watch by both Moody’s and S&P.

Panasonic made a ¥200bn investment in Tesla’s US gigafactory that has yet to prove profitable.

But the company assuaged those concerns by announcing a three year plan to right the ship and align its growing US assets with financing in the bond market.

“We don’t expect this to be a one and done deal,” one syndicate told IFR.

 

HIGH YIELD

Fed chairman Powell’s dovish testimony on Wednesday has given high yield markets a lift, with new deals in the primary market drawing strong demand and inflows to bond funds picking up.

Five deals are expected to price today.

Testing and measurement system firm MTS Systems is due to price its B3/B+ rated 8NC3 senior bond, which has been upsized to US$350m from US$300. The deal has price talk of 6.25% area.

Drug developer Horizon Pharma is also expected to price a US$500m 8NC3 senior unsecured offering.

Door manufacturer Masonite International is out with a US$500m 8.5NC3.5 senior note to refinance its 5.625% senior notes due 2023.

And homebuilding product producer Builders FirstSource is looking to add-on US$75m to the 6.75% senior notes due 2027 it sold in May.

Casino operator Melco Resorts got a strong reception on Wednesday and upsized its Ba2/BB rated 8NC3 offering to US$600m from US$500m, as well as pricing at 5.625%, inside talk of 5.875%.

Tempo Acquisition, a subsidiary of outsourced benefits administration firm Alight Solutions, also priced a US$280m tap of its Caa1/CCC+ rated 6.75% notes due 2025. The tap priced at 101.25.

JP Morgan analysts reported US$472m of inflows to high yield bond funds on Wednesday on the back of Powell’s testimony.

 

STRUCTURED FINANCE

Two new deals joined the pipeline on Thursday, adding to the growing number of deals being lined up for next week.

DLL mandated Credit Suisse and JP Morgan for a US$443.251m equipment loan ABS, DLL 2019-MA2.

Fitch also published a pre-sale report for a new John Deere equipment loan ABS, JDOT 2019-B. RBC Capital Markets is lead underwriter on the deal.

A handful of new auto ABS mandates emerged on Wednesday for next week’s business, but just one new deal was priced: a US$242.386m single-family rental ABS from CoreVest American Finance.

The senior notes on that deal were priced by sole lead Morgan Stanley at IS+100bp, inside guidance of 105bp-110bp.

The RMBS market also saw a couple of mandates emerge, with a US$954m non-QM deal from WAMCO and US$700m mortgage insurance risk transfer trade from Arch. Both are expected to be announced next week.

 

LATAM

It is a busy day for the Latam primary with at least five deals epected to price, including a drive-by deal by Chilean airline LATAM Airlines.

Issuers including Brazilian Usiminas, Mexican financial firm Unifin, Colombian utility EPM, and Argentine Telecom Argentina are also selling deals today.

“The pipeline shows the market is healthy,” said a senior syndicate banker.

Leads set initial price talk for LATAM Airlines’s retap of its 2026 note in the 6.3% area.

While Usiminas has its 7NC4 in the low to mid 6%, Unifin’s 8NC4 is in the high 8% area.

Telecom Argentina’s US benchmark deal is also in the high 8% area and EPM offered IPTs on its 10-year at mid T+200bp and a retap of its COP 2027 at 8% area.

The pipeline of deals remains is robust with Mexican REIT Terrafina, Mexican leasing company Docuformas and Argentine YPF Energia Electrica, a subsidiary of YPF, also expected to wrap investor meetings within the next week.

 

 

EQUITIES

The S&P 500 ascent above 3,000 points for the first time yesterday was unable to stir much new US ECM activity as investors instead focus on second quarter earnings.

Water services provider AquaVenture priced a two-day marketed sale of 4.1m primary shares, raising US$69.2m as the company looks to continue acquisitions.

AquaVenture had to take a hefty 10.4% file-to-offer discount in pricing the deal at US$16.88, a level also below the US$18 offering price set on its October 2016 IPO.

Citigroup, RBC Capital Markets and UBS acted as active bookrunners on the offering, joined by Canaccord Genuity and Raymond James in passive roles.

AquaVenture last year purchased wastewater treatment facility specialist AUC Group for US$130m.

Along with US$57m spent last year to acquire a “point-of-use” water provider, the company had seen net leverage creep up to 3.7-times net debt/Ebitda.

“(The offering) allows them to reload and de-lever a bit,” a banker close to the deal said. “They want remain on the front foot.”

Investors remain otherwise focused on a long list of IPOs that are slated to price next week, some 10 deals raising more than US$3bn.

Bankers expect more IPO launches in the near-term (secondary activity may remain quiet) and are expecting a busier summer than normal as markets continue to hum and they look to make up for the slow start to 2019 due to the government shutdown.

 

 

 

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