Two large acquisition financings from Merck and Ecolab led a crowded investment-grade primary market this week, helping to set a new record for high-grade bond supply in the month of December. As of Tuesday, investment-grade corporate bond issuance this month hit US$57bn, surpassing the US$56bn of supply recorded in the December of 2014, according to IFR calculations. Execution for the M&A-driven jumbo offerings was strong, suggesting demand had recovered since the end of November. Market participants had been wary of participating in the primary market after some bond offerings priced before the Thanksgiving holidays traded poorly on the break. Easing concerns around the Omicron variant's economic impact this week helped restore risk appetite, reversing some of the widening in credit spreads in November. The average IG spread was at 100bp over Treasuries, after climbing to a March high of 104bp on December 2, according to ICE BofA data. Pharmaceutical Merck sold on Tuesday a US$8bn five-part senior unsecured note to support its US$11.5bn purchase of another pharmaceutical company Acceleron, drawing US$32bn of orders. New issue concessions ranged between 2bp to 3bp for the tranches. For its acquisition of resin maker Purolite, water treatment specialist Ecolab raised a US$2.5bn bond on Monday, backed by an order book of US$8.25bn. Market participants had been anticipating some large acquisition financing packages to hit the US primary market. Banks were under pressure to bring any M&A bonds before the end of the year to avoid having to carry risk on their balance sheets through the turn of the year. And market volatility in late November made it tricky to clear the decks before December got underway. “Banks taper [their balance sheet] before going into year-end so there’s [typically] not a lot of supply in general sloshing around,” said Adam Coons, portfolio manager at Winthrop Capital Management. M&A The improvement in corporate balance sheets and earnings throughout this year have meant investors have been more forgiving of debt-financed M&A, especially for companies with a history of whittling down a buildup in leverage from a chunky acquisition. “M&A bond issues can go well. But management has got to have credibility. They’ve got to show they’ve cleaned up their balance sheet before,” said a senior credit analyst. Indeed, Ecolab underlined its commitment to cut down on its debt following its purchase of Purolite, which is expected to lift net leverage to 3.2 times from 2 times, according to CreditSights. The company said it would divert cash to pay down incoming short-term maturities, based on an investor presentation. In the end, the willingness of investors to absorb these large M&A bonds came down to the vibrancy of primary markets and cheap borrowing costs. Even after corporate debt levels swelled from the purchase of a new business, their overall cost of servicing the debt may not have risen much as they were issuing new bonds when Treasury yields remained historically low and credit traded at tight spreads. "The actual debt service is getting better even as leverage is ticking up," said Coons. “It’s easier to manage debt loads when capital markets are wide open. We joke that you could probably issue debt at a lemonade stand right now."
Fannie Mae said on Wednesday it has reached US$100bn in green multifamily mortgage securitization since it launched this program a decade ago. The biggest US mortgage finance agency has issued US$12.7bn in green CMBS in 2021, compared with US$13bn for all of 2020. "Fannie Mae's Multifamily green financing has helped preserve and improve existing housing stock, supporting our efforts to bolster the nation's supply of housing affordable to low- and moderate-income households," Michele Evans, Fannie Mae's executive vice president of multifamily in a statement. In addition to green funding for apartments, Fannie Mae launched in April 2020 a green MBS program for new single-family homes with green building certifications that meet or exceed the national program requirements for ENERGY STAR® 3.0 Certified Homes. At the end of November, Fannie has issued 44 green deals for new single-family homes, totaling US$486m.
Corporate hybrids with a higher equity content could make a return in 2022, further supporting the efficiency and appeal of the instrument and raising the prospect of a new generation of hybrid issuers coming to the primary market. Hybrids have become a key tool in the box for borrowers looking to protect their ratings or fund M&A transactions efficiently. While 2021 is not quite a record, with €36.7bn raised in the single currency, it is not far off the €42.6bn issued in 2020. For investors looking for yield in a low rate environment, it has been the perfect way of getting exposure to the more subordinated part of an issuer's debt stack, notwithstanding that hybrids can be vulnerable during periods of intense volatility. While hybrids with higher equity content would not be completely new to Europe, since 2010 they have all benefited from 50% equity credit or lower. But at least one issuer had seriously considered issuing a hybrid with 75% equity content or Moody’s Basket D this year and while the deal did not come to fruition, such supply could emerge in 2022, which may bring new names to the market. “One area that is going to be exciting, and is a market that has been threatening to unleash but never managed to do so and I wonder if next year might be the year, is Basket D hybrids,” said one banker. “It is hard to bring new issuers into the hybrid market unless there are particular disruptions, like what was seen in the oil sector in 2020, but other than very specific examples, to really bring new issuers into the market, something like establishing a higher equity instrument could make a massive difference.” The Basket D product is a less investor-friendly structure than the now standard Basket C, or 50% equity credit, offering. Therefore investor engagement would be key in attempting to bring the product into the market. If an issuer misses a coupon payment on a Basket C hybrid, that payment and any other missed ones become due once the issuer begins to pay the interest again. With a Basket D, the coupons are non-accumulative, meaning once missed, it is gone forever. The trigger is also different. Whereas with a Basket C the coupon deferral is at the option of the issuer giving it some leeway, for a Basket D structure the deferral trigger is pre-defined, agreed with Moody’s and usually based on some form of cashflow or leverage metric. When Noble Group issued in the format in 2010, the trigger was linked to its interest coverage ratio. Higher yield, less cost Although these features make the product less investor friendly, they also imply a higher yield than hybrids with lower equity content. “We believe it would be a positive development in the market as it would introduce a higher yielding product to the market which we think could be welcomed by investors,” said Andrea Seminara, CIO & CEO of the asset manager RedHedge. As the product is highly tailored to the issuer, the exact additional cost is hard to generalise, but bankers have suggested it would be anything from 25bp to 75bp over what a borrower would pay for a Basket C. There are also ways to ameliorate investor concerns over missed coupon payments. An issuer could sell ordinary shares to pay a coupon. However, this would not be legally binding and the coupon would remain non-accumulative. The product can offer significant benefits to corporates and the higher yield may not necessarily translate into a higher cost to the issuer, depending on its need. “If you need €750m of equity credit, are you better off issuing a €1bn Basket D hybrid or a €1.5bn Basket C hybrid?”, said Kapil Damani, head of capital products at BNP Paribas, who is keen on these instruments returning given their usefulness. “If your stress is more with Moody’s than it is with S&P, then the Basket D hybrid is going to be more attractive from a cost perspective.” The product is id
Corporate hybrids with a higher equity content could make a return in 2022, further supporting the efficiency and appeal of the instrument and raising the prospect of a new generation of hybrid issuers coming to the primary market. Hybrids have become a key tool in the box for borrowers looking to protect their ratings or fund M&A transactions efficiently. While 2021 is not quite a record, with €36.7bn raised in the single currency, it is not far off the €42.6bn issued in 2020. For investors looking for yield in a low rate environment, it has been the perfect way of getting exposure to the more subordinated part of an issuer's debt stack, notwithstanding that hybrids can be vulnerable during periods of intense volatility. While hybrids with higher equity content would not be completely new to Europe, since 2010 they have all benefited from 50% equity credit or lower. But at least one issuer had seriously considered issuing a hybrid with 75% equity content or Moody’s Basket D this year and while the deal did not come to fruition, such supply could emerge in 2022, which may bring new names to the market. “One area that is going to be exciting, and is a market that has been threatening to unleash but never managed to do so and I wonder if next year might be the year, is Basket D hybrids,” said one banker. “It is hard to bring new issuers into the hybrid market unless there are particular disruptions, like what was seen in the oil sector in 2020, but other than very specific examples, to really bring new issuers into the market, something like establishing a higher equity instrument could make a massive difference.” The Basket D product is a less investor-friendly structure than the now standard Basket C, or 50% equity credit, offering. Therefore investor engagement would be key in attempting to bring the product into the market. If an issuer misses a coupon payment on a Basket C hybrid, that payment and any other missed ones become due once the issuer begins to pay the interest again. With a Basket D, the coupons are non-accumulative, meaning once missed, it is gone forever. The trigger is also different. Whereas with a Basket C the coupon deferral is at the option of the issuer giving it some leeway, for a Basket D structure the deferral trigger is pre-defined, agreed with Moody’s and usually based on some form of cashflow or leverage metric. When Noble Group issued in the format in 2010, the trigger was linked to its interest coverage ratio. Higher yield, less cost Although these features make the product less investor friendly, they also imply a higher yield than hybrids with lower equity content. “We believe it would be a positive development in the market as it would introduce a higher yielding product to the market which we think could be welcomed by investors,” said Andrea Seminara, CIO & CEO of the asset manager RedHedge. As the product is highly tailored to the issuer, the exact additional cost is hard to generalise, but bankers have suggested it would be anything from 25bp to 75bp over what a borrower would pay for a Basket C. There are also ways to ameliorate investor concerns over missed coupon payments. An issuer could sell ordinary shares to pay a coupon. However, this would not be legally binding and the coupon would remain non-accumulative. The product can offer significant benefits to corporates and the higher yield may not necessarily translate into a higher cost to the issuer, depending on its need. “If you need €750m of equity credit, are you better off issuing a €1bn Basket D hybrid or a €1.5bn Basket C hybrid?”, said Kapil Damani, head of capital products at BNP Paribas, who is keen on these instruments returning given their usefulness. “If your stress is more with Moody’s than it is with S&P, then the Basket D hybrid is going to be more attractive from a cost perspective.” The product is id
Petroleos Mexicanos, or Pemex, Tuesday afternoon priced a US$1bn 10-year note offering with a 6.70 yield as part of a larger financing package to help stabilize its finances and manage its liabilities. The offering received around US$5bn of orders, according to a source familiar with the deal, adding that there were a variety of investors including large US real money accounts. "It was well received," the source said. Initial price thoughts were in the high 6% area. The final pricing for the note due 2032 was structured with a coupon of 6.70% with a dollar price of 99.976 to yield 6.70%. Yesterday the Mexico-based oil and gas company announced that it would refinance some debt and make tender offers for other bonds as well as receive US$3.5bn of capital from the Mexican government. Pemex said in a statement on Monday that it would launch a "series of measures intended to improve its financial condition, including the commencement of an offering of US dollar-denominated global notes ... and its intention to conduct a liability management transaction targeting certain series of PEMEX outstanding securities. In addition, the Government of Mexico announced that it will make a capital injection of up to US$3.5 billion in PEMEX in connection with the liability management transaction discussed above." The company is offering to exchange 12 series of maturities ranging from 2024 to 2030 for a combination of new securities and cash, while it would make cash offers for the 5.625% bonds due 2046, the 5.500% bonds due 2044, the 6.350% bonds due 2048, the 6.375% bonds due 2045, the 6.750% bonds due 2047, and the 6.950% bonds due 2060. Proceeds from the note sale are expected be allocated initially to the refinancings and any remaining proceeds will be allocated to the tender offers. The 144A/RegS unsecured note offering will be underwritten by active bookrunners Bank of America, Citigroup, Goldman Sachs and HSBC. Initial price thoughts were in the high 6% area. "The liability management transaction does not target outstanding PEMEX securities maturing in 2022 and 2023, given the commitment from the government of Mexico to ensure budgetary allocations for additional capital injections to PEMEX to cover said maturities," Pemex said. S&P Global Ratings, which rates Pemex's foreign currency issues BBB and local currency BBB+, both with negative outlooks, said its ratings on Pemex and its subsidiaries were unaffected by the announcement. Lucror Analytics said in a research note that Pemex is seeking to price up to US$1bn in new 10-year notes. "We reiterate our constructive view on the company, as the proposed transactions further underpin our thesis of continued strong implied government support," Lucror said. "We expect the PEMEX curve to react positively to the announcement, with the proposed notes likely to price close to the existing 5.95 '31s, currently offered at c. 96.7/6.4%/6.7 years." LatAm volume for December kicked off yesterday with US$1bn split between two issuers: a US$500m note from Alsea, a Mexican restaurant operator, and a US$500m issue from Banco de Chile, a bank based in Chile.
SoftBank is looking to offload US$550m of WeWork bonds in a secondary sale this week, one day after the co-working company struck a deal with SoftBank and a syndicate of lenders to extend its credit facility for an additional year. The notes for sale were originally part of a US$2.2bn package of 5% 2025 senior secured notes issued to StarBright WW LP, a SoftBank affiliate, in July 2020. As part of this transaction, SoftBank will split the US$2.2bn notes into US$550m of "Series II" notes that are for sale this week, and designated the remaining US$1.65bn bonds as "Series I" notes, according to marketing materials. Joint bookrunners JP Morgan, Goldman Sachs, Mizuho, Deutsche Bank and Citi are expected to price the bonds on Thursday. Initial price thoughts are a cash price of 85.63 cents on the dollar, implying a 9.875% yield. WeWork's existing CCC+/CCC– rated 7.875% 2025 bonds were trading at a cash price of 96.125 to yield around 9.2% on Monday before the secondary sale was announced, according to MarketAxess. WeWork will not receive any proceeds from the secondary note sale. The company closed a merger with SPAC BowX in October that gave the company total gross cash proceeds of US$1.283bn. On Monday WeWork said it had extended its credit facility with SoftBank and a syndicate of lenders from February 2023 to February 2024. In a rating statement on Tuesday, S&P said it maintained a negative outlook on the company's CCC+ rating. While there is growing expectation that the company could offer a unique solution to large and small businesses in a return-to-work environment, there is still considerable uncertainty about what decisions companies will take on their real estate footprint. "The adoption rates for all of WeWork's offerings could be highly variable given its concentration in urban areas," said S&P. "Gateway urban markets have been subject to shifting demographics as residents relocate to the suburbs to live and, in some cases, work following the imposition of new office capacity restrictions and reduction in real estate or due to the potential rise of satellite offices, which could lead to a sustained decline in the density of corporate offices in such areas."
Petroleos Mexicanos, or Pemex, Tuesday afternoon priced a US$1bn 10-year note offering with a 6.70 yield as part of a larger financing package to help stabilize its finances and manage its liabilities. The offering received around US$5bn of orders, according to a source familiar with the deal, adding that there were a variety of investors including large US real money accounts. "It was well received," the source said. Initial price thoughts were in the high 6% area. The final pricing for the note due 2032 was structured with a coupon of 6.70% with a dollar price of 99.976 to yield 6.70%. Yesterday the Mexico-based oil and gas company announced that it would refinance some debt and make tender offers for other bonds as well as receive US$3.5bn of capital from the Mexican government. Pemex said in a statement on Monday that it would launch a "series of measures intended to improve its financial condition, including the commencement of an offering of US dollar-denominated global notes ... and its intention to conduct a liability management transaction targeting certain series of PEMEX outstanding securities. In addition, the Government of Mexico announced that it will make a capital injection of up to US$3.5 billion in PEMEX in connection with the liability management transaction discussed above." The company is offering to exchange 12 series of maturities ranging from 2024 to 2030 for a combination of new securities and cash, while it would make cash offers for the 5.625% bonds due 2046, the 5.500% bonds due 2044, the 6.350% bonds due 2048, the 6.375% bonds due 2045, the 6.750% bonds due 2047, and the 6.950% bonds due 2060. Proceeds from the note sale are expected be allocated initially to the refinancings and any remaining proceeds will be allocated to the tender offers. The 144A/RegS unsecured note offering will be underwritten by active bookrunners Bank of America, Citigroup, Goldman Sachs and HSBC. Initial price thoughts were in the high 6% area. "The liability management transaction does not target outstanding PEMEX securities maturing in 2022 and 2023, given the commitment from the government of Mexico to ensure budgetary allocations for additional capital injections to PEMEX to cover said maturities," Pemex said. S&P Global Ratings, which rates Pemex's foreign currency issues BBB and local currency BBB+, both with negative outlooks, said its ratings on Pemex and its subsidiaries were unaffected by the announcement. Lucror Analytics said in a research note that Pemex is seeking to price up to US$1bn in new 10-year notes. "We reiterate our constructive view on the company, as the proposed transactions further underpin our thesis of continued strong implied government support," Lucror said. "We expect the PEMEX curve to react positively to the announcement, with the proposed notes likely to price close to the existing 5.95 '31s, currently offered at c. 96.7/6.4%/6.7 years." LatAm volume for December kicked off yesterday with US$1bn split between two issuers: a US$500m note from Alsea, a Mexican restaurant operator, and a US$500m issue from Banco de Chile, a bank based in Chile.
Data center operator Cologix is preparing to issue its first-ever securitization secured by cash flows from 17 facilities, prompted by growing investor demand for this type of digital asset. The US$1.37bn offering, Cologix Series 2021-1, comes after the record-size US$2.1bn issue from rival Flexential that priced in November. The Cologix transaction features four tranches: a US$100m A-1 variable funding note; a US$845m A-2 class; a US$127m B note and a US$64.5m C paper, according to Kroll. The rating agency is expected to assign an A- rating for A-1 and A-2; BBB- for B and BB- for C. Cologix, which is majority-owned by private equity firm Stonepeak Infrastructure Partners, and other data center companies have been growing even during a pandemic because of rising data usage. Deutsche Bank is the sole structurer and joint bookrunner, Kroll said. The bank could not immediately be reached for comment. Co-location service providers such as Cologix, DataBank and Flexential lease to many smaller customers who may only need a shelf, an individual rack or private cage at their data centers under short-term contracts. While the asset class is still relatively new, deals from this kind of data center provider have tended to price with higher yields than those from wholesale, or hyper-scale, data centers where companies rent a large part or even the entire facility under long-term leases. "What you are seeing the data center space is that there is a clear differentiation between deals backed by longer-term contracts with real high-quality tenants on the hyper-scale side and those backed by co-location data centers, which are emerging a tier behind," an ABS banker away from the deal said. The weighted-average remaining term of contracts in the Cologix transaction, which covers 1,064 customers, is 1.5 years. This compared with 9.0 years on US$530m wholesale data center offering in October from Vantage Data Centers which are backed by leases to 14 tenants. While short-term contracts carry greater risks if customers do not to renew their leases, Kroll said Cologix's customer churn or turnover rate has averaged 0.8% since 2018, which is below the industry's average of 1%. The emergence of co-location issuers has bolstered data center ABS supply this year. It has totaled US$5.5bn so far this year, which has far surpassed the $2.4bn total for all of 2020, according to IFR.
SoftBank is looking to offload US$550m of WeWork bonds in a secondary sale this week, one day after the co-working company struck a deal with SoftBank and a syndicate of lenders to extend its credit facility for an additional year. The notes for sale were originally part of a US$2.2bn package of 5% 2025 senior secured notes issued to StarBright WW LP, a SoftBank affiliate, in July 2020. As part of this transaction, SoftBank will split the US$2.2bn notes into US$550m of "Series II" notes that are for sale this week, and designated the remaining US$1.65bn bonds as "Series I" notes, according to marketing materials. Joint bookrunners JP Morgan, Goldman Sachs, Mizuho, Deutsche Bank and Citi are expected to price the bonds on Thursday. Initial price thoughts are a cash price of 85.63 cents on the dollar, implying a 9.875% yield. WeWork's existing CCC+/CCC– rated 7.875% 2025 bonds were trading at a cash price of 96.125 to yield around 9.2% on Monday before the secondary sale was announced, according to MarketAxess. WeWork will not receive any proceeds from the secondary note sale. The company closed a merger with SPAC BowX in October that gave the company total gross cash proceeds of US$1.283bn. On Monday WeWork said it had extended its credit facility with SoftBank and a syndicate of lenders from February 2023 to February 2024. In a rating statement on Tuesday, S&P said it maintained a negative outlook on the company's CCC+ rating. While there is growing expectation that the company could offer a unique solution to large and small businesses in a return-to-work environment, there is still considerable uncertainty about what decisions companies will take on their real estate footprint. "The adoption rates for all of WeWork's offerings could be highly variable given its concentration in urban areas," said S&P. "Gateway urban markets have been subject to shifting demographics as residents relocate to the suburbs to live and, in some cases, work following the imposition of new office capacity restrictions and reduction in real estate or due to the potential rise of satellite offices, which could lead to a sustained decline in the density of corporate offices in such areas."
Western Digital made use of its freshly minted investment-grade rating to sell a new senior unsecured bond on Tuesday, as it shifts away from secured financing towards an unencumbered balance sheet. The maker of hard drives and flash data storage devices issued US$1bn of senior unsecured notes split evenly across a seven-year and a 10-year tranche via bookrunners BofA Securities, JP Morgan and MUFG. Strong demand helped leads tighten pricing aggressively by 35bp for each tranche from initial thoughts, eventually printing the notes at 145bp and 165bp over Treasuries, respectively. Market participants suggested bookrunners, encouraged by the upward trajectory of Western Digital's credit rating, may have pushed for an unsecured format. Western Digital initially marketed a potential secured bond offering on its Friday roadshow. But when the deal hit the primary market, the company switched to an unsecured bond instead. This came after Fitch upgraded Western Digital to BBB- from BB+ on Friday, putting the company solidly in investment-grade bond indexes. Moody's had already given the company a Baa3 rating, with only S&P leaving Western Digital at sub investment-grade. "We think an unsecured bond deal makes more sense given the company's desire to strengthen its balance sheet, particularly as its entire structure will now be unsecured and its bonds will be in IG indices," said CreditSights analysts. "The switch to an unsecured bond deal is also favorable for the existing notes since they will no longer be layered behind a significant amount of secured debt." Western Digital will pay down a chunk of its nearly US$4.3 term loan A with the proceeds from the new bond. It is also replacing the remainder of its term loan A with a new US$3bn term loan B maturing in 2027. The company had also triggered provisions on a loan agreement to change its outstanding US944m term loan B into unsecured obligations, removing all secured instruments from its capital structure, according to a corporate filing from Monday. The move would give Western Digital the flexibility to raise secured financing in times of distress.
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