No corporate bonds are expected to price on Monday as the market looks ahead to Wednesday’s Federal Open Market Committee meeting.
Investors are anticipating what effect Friday’s Consumer Price Index figure, which showed the worst inflation in decades, will have on the Fed’s ultimate rate-hike decisions going forward.
“The Committee is widely expected to announce its second 50bp rate hike, although Friday's inflation report has led the market to price about a 30% probability of a 75bp rate increase,” BMO said in a Monday report. “We expect the Fed will ultimately stick with what it has messaged; a 75bp hike could be viewed as an admission that the Fed has lost control of inflation, a message they would rather not send.”
The capital markets are volatile this morning. US stocks opened down, with the S&P 500 index trading 2.6% lower at 10am and the Nasdaq Composite falling 3.1%. The 10-year Treasury was quoted at around 3.28%.
No bonds priced in the US investment grade market last Thursday and Friday, leaving weekly issuance at US$34.75bn, according to IFR data. Total IG volume for June is US$52.05bn, with 2022 year-to-date issuance at US$716.79bn, the data show.
The average IG bond spread widened 3bp to 141bp on Friday, and the HY spread increased by 9bp to 451bp, according to ICE BofA data.
“High grade credit spreads widened 3bp last week and are poised to open another 3-5bp wider this morning,” BMO said. “After trading flat for most of the week, risk tone suffered significantly on Friday following the upside surprise to CPI and the worst consumer sentiment figure in over 40 years.”
HIGH GRADE
Turbulence across risky assets on Monday pushed borrowers onto the sidelines, leaving fewer days available this week for raising debt.
The lack of issuance comes as the strong fundamentals of the US corporate bond market have come into question, following economic data on Friday showing a larger-than-expected increase in consumer prices in May. Expectations for heightened interest-rate volatility, fanned by an aggressive Federal Reserve, has raised the risk of corporate treasurers having to come to the new-issue market at much higher rates than a year ago.
Market participants are also looking ahead to the jumbo debt financing package for cloud computing service provider Oracle's acquisition of Cerner, which could contribute US$15bn-US$25bn of supply to the high-grade pipeline. Oracle could issue the bonds as soon as this week, after it reports fourth quarter earnings after today's market close.
Analysts worry the performance of the offering could turn into a referendum on the primary market's health. Though investors are likely to have kept cash ahead of the offering, a lackluster showing could reveal that "underlying demand is weaker than anticipated and is sufficient to reprice secondary spreads wider," said BMO analysts in a Monday note.
HIGH YIELD
No new high-yield deals were expected in the primary on Monday.
Last week saw a flurry of new high-yield deals price for a total of US$3.15bn among six issuers including CDK Global, Univision Communications and Callon Petroleum.
Still in the deal pipeline for high-yield is Intertape Polymer Group with a US$400m 6.5-year non-call three senior unsecured note, which will fund Clearlake Capital's buyout of the packaging product company. Its roadshow ended last Friday. Pricing details have not been disclosed.
STRUCTURED FINANCE
The asset-backed primary is poised for another busy week as issuers push to bring deals to market before quarter-end.
The auto sector is expected to lead the week's supply. General Motors' AmeriCredit and Warburg Pincus' Exeter Finance have been shopping their latest subprime securitizations, the US$1.13bn AMCAR 2022-2 and US$842bn EART 2022-3, respectively. Enterprise is expected to raise US$1bn with its fleet lease deal, EFF 2022-2.
In the consumer loan sector, buy-now-pay-later lender Affirm is readying a US$353m installment loan issue, AFFRM 2022-Z1.
Nearly US$12bn in ABS supply priced last week, bringing year-to-date issuance to US$132.9bn, which was up from US$121.0bn from the same period a year ago, according to IFR data.
"Overall, spreads and sentiment were mostly unchanged with strong demand for plain vanilla paper and more scrutiny on anything off-the-run," JP Morgan analysts wrote in a research note on Friday. "However, continued heavy issuance activity also caused some pressure on spreads in auto ABS."
Meanwhile, the CMBS sector is expected to be muted this week as market participants are gathering in New York for the annual CREFC conference.
LATAM
LATAM Airlines announced on Saturday that it has secured financing to exit Chapter 11, signing commitment letters with JP Morgan, Goldman Sachs, Barclays, BNP Paribas, and Natixis.
The financing would comprise a US$500m revolver and US$2.25bn in new debt. The revolver could accrue at either ABR plus 3% or SOFR plus 4%.
The new debt would include a US$750m term B loan facility, a US$750m bridge to five-year notes proposal and a US$750m bridge to a seven-year notes proposal. The exit financing is a part of the airline's reorganization plan, which is awaiting a ruling from the US Bankruptcy Court for the southern District of New York. The airline said the reorganization plan has close to 90% creditor support. Proceeds from the exit financing will be used in part to repay an existing DIP financing in full.
The Central American Bank for Economic Integration, the Inter-American Development Bank, Latin American development bank CAF and the Caribbean Development Bank have committed in the Ninth Summit of the Americas to a US$50bn investment to support climate action in the region over the next five years, Cabei announced in a press release last week.
Fitch affirmed on Friday Colombia's BB+ rating with a stable outlook. The rating reflects the country's "track record of macroeconomic and financial stability underpinned by an independent central bank with an inflation targeting regime and a fee-floating currency," the rating agency said.
LatAm sovereign 5-year CDS widened 14bp for Colombia, 6-7bp for Brazil and Mexico, as well as 3-4bp for Chile and Peru, according to Lucror Analytics.
EQUITIES
US ECM opportunities are likely to remain scarce as risk assets begin the new week sharply lower ahead of Wednesday’s widely expected 50bp Fed funds rate increase.
Still reeling from a hotter-than-expected May consumer inflation print on Friday, major US stock indexes were on track for a circa-2% decline to start the new week, pushing the S&P 500 back into an official bear market (down more than 20% from January's record high). The most damage is being felt at the most speculative end of the risk curve, namely bitcoin, whose price was down double-digits early Monday.
No IPOs launched, extending a lengthy deal drought. None of substance has priced in a month (ProFrac on May 13 was the last US$50m-plus offering).
The ECM landscape is not entirely barren. Biotech Cogent Biosciences is looking to ride a tailwind from positive clinical trial results into a US$125m follow-on stock sale.
Lead bookrunners Jefferies, Piper Sandler and Guggenheim Securities are undertaking a day of marketing before pricing the offering post-close Monday.
Cogent shares soared 58.7% to US$7.87 on Friday after the biotech released updated results from a Phase II trial of its lead blood cancer drug.
The results triggered reverse inquiry about a potential stock sale.
Though only 11 patients have been treated so far, all are responding to treatment with at least a 50% reduction in cancer biomarkers.
Cogent will present its preliminary Phase II results later today at the 2022 European Hematology Association (EHA) Congress in Vienna.