IFR SNAPSHOT-Still craving after all these yields

8 min read
John J. Doran

Investors and issuers are still finding each other in the IG primary, with five deals on tap, following a very prolific Monday of issuance.

In the midst of the stock market selloff and US Treasury volatility, IG issuers managed to sell 9 deals yesterday totaling US$11.1bn, according to IFR data.

That pushed monthly issuance to US$52.496bn and year-to-date issuance to US$751.584bn.

With talk of negative yields, investors are scouring the market looking to pick up some return.

HIGH GRADE

Five borrowers across 13 tranches announced deals Tuesday as issuers look to lock in attractive coupons ahead of the Labor-day lull that is expected to take over the market starting next week.

Tuesday’s volume is a continuation of the nine issuers across 18 tranches that came to the market Monday.

Daimler Finance, the parent lender of Mercedes-Benz, raised the most at US$4bn, but gave up the largest new issue concession of the day with a 13bp premium over its existing curve.

Concessions were elevated to around 6bp-10bp for nearly all the tranches priced Monday, according to IFR calculations.

Even at those modestly higher concessions, borrowers were still able to lock in attractive coupons as the 10-year Treasury rate closed at 1.636%.

Today, oil giant Exxon Mobil is carrying on the trend Tuesday after announcing a seven-part bond for general corporate purposes.

Exxon’s large trade seeks to copy the successful bookbuilds Occidental Petroleum and CVS Health received for their sizable bond offerings last week.

Package delivery company UPS is also in the market with a three-part bond to fund its pension plans.

Earlier this week, Moody’s and S&P downgraded UPS’ rating one notch to A2 and A, respectively, in recognition of its growing pension funding obligations against a more challenging operating environment.

The other issuers include electronic trading platform TD Ameritrade and REITs Regency Centers and Duke Realty.

HIGH YIELD

It looks like a slow day ahead for the US high-yield corporate bond primaries after Tenet HealthCare raised US$4.2bn in a three-part trade yesterday.

The Dallas-based hospital operator, rated Ba3/BB-, crossed the finish line in a tough day for the markets, later adding shorter dated 5NC2, which was upsized to US$600m from US$500m and priced at 4.625%.

This came on top of the original 6.35-year NC2.5, which was downsized to US$2.1bn and priced at 4.875%, within in price talk of 4.75%-5%.

It also priced a US$1.5bn 8.2-year NC3.2, which landed at a final yield of 5.125%, also within price talk of 5%-5.25%.

Those bonds were some of the most actively traded securities in the US corporate bond space, with the 5.125% 2027s, the 4.875% 2026s and the 4.627% 2024 changing hands at 100.125, 100.375 and 99.875 this morning, according to MarketAxess data.

All three tranches were priced at par.

“There is still a bid for high-quality credits in a marketplace where we are starting to see more uncertainty,” said an investor.

“Double Bs are near historical tights. One of the challenges is that everyone has the same trade on. They all trying to own high-quality credits and they may be paying too much, meaning it is no longer safe.”

STRUCTURED FINANCE

Price guidance emerged on Tuesday for a handful of ABS.

Primrose Schools’ debut whole business securitization, which is due to be priced on Wednesday, has guidance of 4.75% area on the BBB rated A-2 tranche on offer.

Diamond Resorts is out with guidance on its US$315m timeshare resort ABS, which is due to be priced this week. The A class of notes has guidance of 125bp-140bp over swaps.

Flagship Credit Acceptance has indicated the A class of its US$317m subprime auto deal at EDSF+50bp-53bp.

Wells Fargo analysts said Monday that ABS spreads were holding up well despite volatility in broader markets and the move in rates.

Secondary spreads moved just 4bp-5bp last week, they said.

“We view this as solid performance considering rate levels, the shape of the yield curve and swap spreads are working against ABS spread stability. Demand for ABS remains strong despite the substantial headwinds in the rates markets,” wrote the analysts.

A US$400m servicer advance RMBS from New Residential was the only deal to price in the structured finance market on Monday. The senior Triple A rated, four year A-T2 class was priced at 110bp over swaps.

LATAM

Argentine assets continue to weaken this morning as the fallout from Macri’s primary loss weighs on sentiment.

The sovereign’s 6.875% 2021 was quoted at around 57 to 60 this morning, down from yesterday afternoon where it stood at around 65.5, and almost 30bp lower than Fridays close at 86.75.

“There’s still liquidation going on and I expect it to continue,” said a New York-based trader.

Argentina’s century bond is being placed at a range between 44 and 52.5, according to the trader. That is a stark contrast from when it was first issued more than two years ago at 90.

YPF’s, the country’s national oil company, had its 8.5 2021 also trading down by about 2.5 points from yesterday’s close. The note is trading at 89.750 to yield 15.968, according to MarketAxess.

No deal announcements are expected this morning.

EQUITIES

Eight equity and equity-linked deals launched last night seeking a hefty US$4bn-plus of proceeds, including two that priced on an overnight basis.

In the largest transaction, Southern Company is looking to fund its equity needs through 2022 from the sale of a US$1.5bn, three-year mandatory convertible.

Goldman Sachs, Barclays, Citigroup and Morgan Stanley are marketing the MCB today at a dividend of 6.625%-7.125% and conversion premium of 17.5%-22.5%. The yield represents just a 240bp-290bp pick-up over the 4.2% yield on the underlying stock, aggressive relative to other transactions in the sector.

Southern’s MCB is structured as tangible equity units (TEUs) that are comprised of a three-year forward purchase agreement of the underlying shares and subordinated debt host, a ratings-friendly structure that also allows for tax deductibility on interest paid.

In the case of Southern, the debt underlying the TEUs are five and eight-year tenors, mitigating the risks of re-marketing the securities in three years.

Akamai Technologies is in the market with a more opportunistic, a US$1bn raise from the sale of an eight-year CB.

JP Morgan, Morgan Stanley and Bank of America Merrill Lynch are marketing the CB at a coupon of 0%-0.5% and conversion premium of 30%-35%, extremely issuer-friendly terms for eight-year financing.

Workiva, a cloud-based compliance platform, last night launched a two-part US$380m combo offering of common stock convertible debt.

Goldman Sachs is the sole bookrunner on the equity and joined by SunTrust Robinson Humphrey on the CB. Selling shareholders are seeking to sell 1.3m shares.

IT equipment reseller Insight Enterprises also priced a US$300m 5.5y CB last night.

JP Morgan, Wells Fargo and Bank of America Merrill Lynch set pricing at 0.75%, up 32.5%, issuer-friendly to marketing terms of 0.75%-1.25%, up 30%-35%.