Thin order books and hefty concessions have marred the US investment-grade primary over the past two weeks, sparking concerns issuers are facing a sustained drop in investor demand in the wake of a sharp rise in interest rates.
Though many market participants had been expecting tough conditions for new borrowers, few had been prepared for the speed at which long-term bond yields shot higher at the start of the year and bruised investors who took part in the initial wave of investment grade bond offerings.
“People who bought deals on an unhedged basis were looking at a pretty serious loss so that causes people to pull back a bit. The issuers say if we’re going to hit an air pocket, that incentivizes us to move forward [on debt issuance] even more. The market needs to readjust. Bankers need to price deals so that investors get the confidence to come back," said John Sheehan, a portfolio manager at Osterweis Capital Management.
The Federal Reserve's more hawkish tone has sparked chatter the US central bank could attempt to taper bond purchases, shrink the balance sheet and raise interest rates all in the same year, a daunting backdrop that is set to become more likely following a US consumer price report showing inflation had run at around an annualized 7% in December.
Those expectations sent long-term bond yields sharply higher, pushing them to around a high of around 1.80% on Monday from 1.51% at the end of last year.
Chastened by the selloff in US government bonds, investors have been wary of diving back into a primary market that is off to a blistering start. IG issuers have raised US$107bn in the month already, the busiest start to the year since at least 2010, according to Bank of America researchers.
FIG borrowers have been responsible for around two thirds of the supply flowing into the primary market so far this year, according to BMO. Yet investor fatigue has set in as money managers are anticipating a traditionally busy spell of supply from the large US banks, said investors.
FIG deals have seen new issue concessions of 4.9bp in the year-to-date through Wednesday, more elevated than the 1.6bp recorded by their corporate peers. Order books also came in 2 times oversubscribed for FIG borrowers, versus 2.4 times for corporates.
One FIG borrower, business development company Main Street Capital, even postponed a deal on Tuesday citing market conditions.
In a hurry
Despite this backdrop of insipid demand, foreign banks may have felt they had no choice but to get deals done this month if only to front-run the rise in interest rates and heavy US bank supply.
"There is some desire to stay ahead of the big US money center banks as they begin to exit their earnings blackout periods on Friday," said Dan Bruzzo, managing director at Amherst Pierpont.
This urgency may have led to Yankee banks bundling together their subordinated and plain-vanilla issuance into single deals, more in line with how US financial institutions have printed debt.
French bank Societe Generale raised US$5bn on Tuesday from a five-part offering, its biggest US dollar transaction, changing tack from its previous strategy of issuing in one or two parts.
At the same time, some argue this approach may make it more difficult for borrowers to drive price tension across their capital structure.
“Once upon a time, big global issuers would’ve wanted to have avoided that outcome. They would look at their capital structure and their maturity curve, and then would pick and choose parts they wanted to target. They wanted to be in control of how their curve was priced, and how the senior preferreds were priced against the subordinated debt," said Sheehan.