Wednesday, May 29, 2024

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Rush of deals hits US corporate bond market as borrowing premiums fall

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Businesses have rushed to tap lenders in the $10tn US corporate bond market this week, taking advantage of feverish investor demand and low borrowing premiums to issue swaths of new debt.

High-yield or junk-rated companies have issued over $14bn worth of dollar-denominated bonds this week across more than 20 deals, according to data from LSEG and FT calculations, the highest totals since late 2021.

Investment-grade borrowers, which typically have much more consistent access to capital markets because of their stronger credit quality, have sold $56.7bn of new bonds across 45 issuances — the largest weekly dollar amount raised since late February and the greatest deal count in two-and-a-half years.

Bankers and investors highlighted a growing conviction in markets that US interest rates are unlikely to fall steeply this year, prompting companies to meet their funding needs now rather than risking higher borrowing costs while waiting for another opportunity. November’s US election also threatens to unsettle markets late in the year.

They also pointed to pricing becoming more attractive since Federal Reserve chair Jay Powell indicated last week that the next move in rates was unlikely to be higher. Weaker-than-expected recent jobs market data also helped to fuel predictions of one or two quarter-point rate cuts by the end of this year.

The latest spate of borrowing in investment-grade and high-yield comes as credit spreads, or the premiums that corporate borrowers pay to issue debt over US Treasury bonds, have approached their lowest levels in almost two decades this week. Spreads have been squeezed as big investors stampede into the market to lock in attractive yields.

“It’s clearly been an exceptionally busy week in the investment grade bond market, particularly the first three trading sessions of this week,” said Dan Mead, head of the investment-grade syndicate at BofA Securities. “I think what we have seen is perhaps a bit of capitulation from issuers that rates are going to stay higher for longer and less of an expectation that we’re likely to see a material move lower in rates anytime soon.”

“Last week set us up for a pretty decent reception here,” said Laleh Bashirrad, managing director of BNP Paribas’ leveraged syndicate desk. “I think investor optimism has transitioned to more of a ‘hey, it’s higher and manageable’ [point of view].”

Some of the high-yield borrowers to come to market this week included healthcare group Organon, which sold $1bn worth of bonds to help pay down a term loan, while oil and gas producer Hilcorp sold a $500mn bond, with proceeds intended partly to repay borrowings. Block, the payments company, issued $2bn worth of bonds in an upsized deal.

A bond from IT business Presidio increased in size from $500mn to $750mn, after $250mn was shifted across from a concurrent loan deal that ultimately totalled $1.85bn. The proceeds were earmarked for funding private equity firm CD&R’s acquisition of a majority stake in Presidio from BC Partners.

In the investment-grade market, which saw a particularly strong start to the year for borrowing, bond deals to price this week included a $5bn offering from pharmacy giant CVS, a $3bn sale from Coca-Cola and a $2.25bn placement from Italian energy company Eni. Broadband and cable company Charter Communications sold $3bn of bonds in part to pre-pay a term loan and to fund potential stock buybacks.

Still, market participants suggested that the pace of issuance may start to slow.

“We’ve been running at record issuance volumes through the first quarter and then of course we’ve had this flurry over the last week,” said BofA’s Mead. “Our expectation still remains that it has largely been a pull forward of issuance, meaning that it will be a quieter second half of 2024.”

On the lower-grade front, BNP’s Bashirrad said “issuers are just getting smarter” in taking advantage of opportunities. “When that window is open, just hit it.”

Many new issues have been met with intense demand from investors, compressing spreads and reducing the cost of borrowing relative to Treasuries.

Line chart of Option-adjusted spread (percentage points) showing US high-yield bond spread narrows close to 2007 levels

The average US high-yield spread shrank to within a whisker of its lowest point since 2007 on Monday, according to Ice BofA data — touching 3.03 percentage points, before widening as issuance picked up. The average investment-grade spread tightened to as little as 0.88 percentage points, its lowest level since late 2021 and inches away from its narrowest point since 2005.

Adam Abbas, head of fixed income at Harris Associates, said spread narrowing reflected a mixture of “strong technicals” and “people’s increasing conviction that the Fed can get through this — get inflation down without fundamentally changing the economic picture”.

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