Sunday, 22 July 2018

Three issuers brave US high-grade market for US$2.6bn

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Three corporate borrowers braved the US investment-grade bond market on Tuesday, getting a warm welcome from investors after days of volatility soured the tone for new issuance.

US$2.6bn priced in Tuesday’s session amid tighter credit spreads, and bankers said there should be more deals ahead – and more strong demand – as long as conditions remain steady.

The CDX IG 22 index tightened by 2bp to 64.5bp, according to Tradeweb, retracing much of the previous day’s losses, while cash bonds narrowed a couple of basis points and equity markets steadied.

“If we open up tomorrow and things look steady, more issuers will definitely look,” said one syndicate banker.

The biggest trade of the day came from Triple B rated BAE Systems, which amassed a US$5bn book for its dual-tranche issue at the peak before leads narrowed levels.

The 10-year was ratcheted in by 15bp, while the 30-year was tightened 25bp. Final books were heard around US$4bn.

Leads began marketing the transaction with initial price thoughts set at Treasuries plus 150bp area for the 10-year, and 180bp area for the 30-year piece.

The US$800m 3.80% 10-year priced at T+135bp and the US$300m 4.75% 30-year at T+160bp. In a positive sign for the market, they were spotted at 3bp and 1bp tighter, respectively, in the secondary.

Even after significant narrowing during bookbuilding, the BAE trade offered considerable pick-up to secondaries and perceived fair value, especially for an industry which has not seen much in the way of paper.

“There has been minimal new issuance in the defense sector this year,” Morningstar credit analyst Thomas Myhre said.

“With its defensive qualities in a more volatile corporate bond environment, we view this as an attractive offering.”

Comparables include BAE’s 6.375% 2019s at a G-spread of 98bp.

Subtract 13bp for that note’s high dollar price and then add 40-45bp for the credit curve between five and 10-year maturities, and fair value looked to be around 125bp–130bp on the 10-year.

Based on that, the new issue concession appeared to be around 5bp–10bp on both tranches, based on IFR calculations, though the banker put the NIC closer to 10bp on the 10 and slightly lower on the 30.

“The important thing is that the demand for all the deals today was strong. It shows investors still have plenty of cash to put to work,” the syndicate banker said.

Single A rated SC Johnson & Sons Inc raised US$500m from a no-grow deal that was also split between 10-year and 30-year slices.

Leads priced a US$250m 3.35% 2024 at T+87.5bp and a US$250m 4.35% 2044 at T+120bp, versus guidance of 90bp area and 125bp area.

Books were heard to be decent at around US$2.5bn in total, with concessions estimated at 7.5bp on the 10-year and double that on the 30-year.

The other deal to price Tuesday was a re-marketed issue for MetLife Inc, consisting of a US$499.924m three-year and a US$499.924 30-year that attracted a combined US$5.1bn in orders.

Gross miscalculation

Even with the slowdown in volumes in the past couple of sessions, September’s US$128.718bn issuance tally is the third-largest month ever, according to IFR data.

Bankers believe issuance will pick up ahead of upcoming earnings blackouts, and many say Bill Gross’s surprise departure from Pimco may not cause the mass sell-off that some at first had feared.

“If it was going to happen, it would be happening now in real time,” said one head of credit research at a non-US bank.

Although there could be some pressure in certain parts of the market caused by outflows from Pimco, one factor which could temper the impact could be pension funds opting to transfer their bonds to other funds rather than paid back in cash.

This can be done by using a “redemptions in kind” feature.

“I think the redemptions in kind is a real possibility in this case,” said one head of investment-grade bond research at a US bank.

But he cautioned there could still be some selling pressure if Pimco’s damage control efforts aren’t effective.

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