Corporates more vulnerable to the economic damage being caused by the coronavirus pandemic joined in the borrowing spree in the investment-grade markets last week as issuance records again tumbled on both sides of the Atlantic.
Despite bleak warnings from President Trump about the number of lives that could be lost in the US from the virus and further awful economic data sending US equity markets back into a downward spiral, the US credit markets were dancing to a different tune.
In Europe, too, a number of issuers from more troubled sectors were out in force, some with blowout deals, as anchor support from the ECB helped to smash the weekly issuance record in the euro investment-grade corporate market.
While upcoming earnings blackouts and the Easter holiday will provide a natural pause in issuance, one banker summed up the view of many when he said the market had "come too far, too fast".
No deal, however, has failed since March 23 when the US Federal Reserve joined the ranks of central banks prepared to buy corporate bonds – though there's no evidence it has actually done so yet.
Instead there has been an unprecedented scale of borrowing as corporates seek to build their cash balances, refinance debt and generally put themselves in a better position to weather further volatility.
In the US high-grade market, another US$110.9bn of bonds was priced last week as of Thursday's close, establishing a new weekly issuance record just a week after the last one was set. The US$109bn issued the previous week helped establish new monthly and quarterly records – something unimaginable just a fortnight ago.
More than US$256bn of bonds were sold in March to help to take the first-quarter's tally to just less than US$486bn. All that, despite record weekly outflows from high-grade bond funds during March.
IT'S ALL RELATIVE
While the initial funding rally was paved by blue-chip names, last week was characterised by issuance from Triple B credits at risk of becoming fallen angels.
"As of Monday, access opened up to the broader IG community in a way that it really wasn't even a week ago," said one DCM syndicate banker.
"There are a number of funding stresses in other markets, so the reprieve in IG primary credit and the rally in the secondaries makes the high-grade market a lot more attractive on a relative basis."
Issuers included Fox Corp, General Mills and Sysco as well as a number of lesser-known utility and financial names.
Sysco's US$4bn four-part bond is viewed as the prime example of the shift for Triple Bs.
The company distributes food to restaurants, stadiums and other events involving crowds, which puts it under considerable pressure as such activities are cancelled.
"No company is entirely insulated from the downturn, but if you're a global brand name like Coke, Pepsi or Verizon – these sorts of names that are attributed with reopening the market – they obviously have a lot of diversified business lines, scale and breadth," said a lead on the Sysco trade.
"Sysco's business, on the other hand, is delivering food to restaurants, venues and theatres so obviously they are right in the eye of the storm."
Moody's downgraded Sysco to Baa1 from A3, while S&P affirmed its BBB– rating with a negative outlook, heightening fallen angel fears. Ahead of issuance, Fitch also released a first-time rating for Sysco at BBB with a negative outlook.
Yet the US$4bn bond deal made it over the finish line with a remarkable US$24.4bn in orders.
"People are concerned about Sysco falling to junk," one investor said. "It shows that debt markets are open for even riskier names right now."
The food distributor did have to pay up handsomely though. Sysco priced a US$750m five-year, a US$1.25bn 10-year, a US$750m 20-year and a US$1.25bn 30-year all at 525bp over Treasuries.
Those spreads were way above fair value with the new-issue premium at 125bp–130bp, according to IFR calculations, though one syndicate banker away from the trade pegged it closer to 200bp.
The lead banker said Sysco management went above and beyond to get the deal done by seeking out a third credit rating, adding coupon step-ups in the event of a downgrade to high-yield and adding change-of-control language to the covenants.
The bonds were trading some 70bp–85bp tighter in the aftermarket on Tuesday, according to MarketAxess.
"The Sysco deal shows that the market has evolved and broadened to the point where there is access now for these sorts of names," the lead banker said.
It was a similar story in Europe, although issuance from trickier sectors was not confined to Triple B rated corporates.
Issuers came from the auto sector (Volkswagen, Daimler), oil (Total, Shell, BP, OMV), air travel (Airbus, Royal Schiphol) and real estate (Vonovia, Grand City, Unibail-Rodamco-Westfield).
Such issuers, together with some more defensive credits, such as utility E.ON and telecoms Orange, helped swell euro issuance volumes to €39.55bn, easily beating the previous weekly record of €24.05bn set in the first week of September 2019.
This came despite €140bn of debt within the investment-grade sector being downgraded in March, according to Bank of America calculations. Few industries were spared.
"We are in a very strange environment. There is a high degree of consensus of what people want to do, but they can't do it. They would like to buy defensive names which have sold off but no one will sell at a reasonable price," said Andrew Jackson, head of fixed income at the international business of Federated Hermes.
"Everyone would like to sell what they don't like, but there are just no buyers. If a new issue comes at a meaningful premium and it's a reasonably high-quality name, then you are going to jump at that."
That proved to the case for Total, for example, whose €3bn dual-tranche deal saw demand top €13.5bn. The deal was upsized from €2.5bn.
"The company has one of the best balance sheets in the sector to deal with the current price volatility," said Christian Hantel, senior portfolio manager for global corporate bonds at Vontobel.
The slump in oil prices has forced Total to reassess its business strategy, including cutting costs and suspending its share buyback programme.
Leads began with concessions of around 70bp but by the end were able snip 40bp off. The company, rated A3/A–, has negative outlooks from Moody's and S&P hanging over it, but investors appear comfortable with the risk.
Dutch airport Royal Schiphol is also on negative outlook with the agencies for its A1/A+ ratings but was still able to upsize an expected €500m nine-year green bond to €750m.
For investors the repricing of these still relatively high-rated credits is the big draw.
"Definitively the trigger for investing in those names, Total and Royal Schiphol, is the spread concession compared with both the secondary market and the historical premium for these high-rated companies," said Ismael Lecanu, senior credit portfolio manager at AXA Investment Managers.
The real estate deals proved a bit more of a challenge. Unlike other sectors, landlords aren't being given government assistance.
Grand City, a Baa1/BBB+ rated residential REIT with properties in Germany, for example, had to sell a €600m four-year bond off a book of €1.1bn, leaving the deal less than twice covered.
Still, some investors feel far more comfortable with residential real estate than retail properties.
"Retail is particularly scary," said an investor. "I'm doubting there's much of a rebound even once we are out of lockdown – the recession will kick in then."
And yet Unibail, which owns shopping centres, raised €1.4bn in debt split between a €600m five-year bond and a €800m 10-year note.
Investors placed €3.1bn in orders thanks to a premium seen at 80bp on both tranches at initial price thoughts and at 50bp–55bp by the end.
Unibail, rated A3/A– (both with negative outlook), said that it had €10.2bn in cash on hand and undrawn credit lines.
Clearly the presence of the ECB in the primary market is adding a big degree of comfort, though it also keeping other investors on their toes.
"The worst-case scenario is that you are underweight or – worse – short something the ECB is buying," said Jackson. "Spreads can tighten in very rapidly if the ECB changes what it is buying and that can be very painful."
But the ECB isn't alone in supporting books. One of the consequences of the coronavirus-inspired sell-off is that it has brought other investors into the fold.
Absolute return investors, for example, are returning to the asset class after being priced out when yields were getting crushed to historical lows.
"There are lots of absolute return investors. They may not be the longest-term investors, but they're helping oversubscription," said a senior banker.
Another group dipping into the investment-grade market is those bank treasuries that traditionally buy peripheral eurozone sovereign debt. Some high-yield funds with flexible mandates are also buying.
These buyers are complementing the insurers and asset managers that are attracted by the relatively higher yields on offer.
Additional reporting by Robert Hogg and Eleanor Duncan.