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Companies are taking advantage of frenzied investor demand and low borrowing premiums this week to issue a flood of new bonds and rush to find lenders in the $10 trillion U.S. corporate bond market.
High-yield or junk-rated companies have issued $14 billion worth of dollar-denominated bonds in more than 20 deals this week, the highest total since late 2021, according to data calculated by LSEG and FT. .
Investment-grade borrowers, who typically have higher credit quality and therefore more consistent access to capital markets, sold $56.7 billion of new debt in 45 issues. This was the largest weekly raise since late February and the largest number of deals in the past two years. One and a half years.
Bankers and investors underlined growing confidence in the market that U.S. interest rates are unlikely to fall significantly this year, with companies risking higher borrowing costs as they wait for other opportunities. It urges them to meet their financial needs now, rather than waiting. The US election in November could also cause market instability at the end of the year.
He also noted that pricing has become more attractive since Federal Reserve Chairman Jerome Powell suggested last week that another rate hike was unlikely. Weaker-than-expected recent job market data also supported expectations for a rate cut of one to two quarter points by the end of this year.
The recent surge in investment-grade, high-yield borrowing comes as credit spreads, or the premiums corporate borrowers pay when issuing bonds over U.S. Treasuries, are this week nearing their lowest level in nearly 20 years. This was in response to the incident. Spreads are tightening as big investors flood the market to secure attractive yields.
“It's clearly been an unusually busy week for the investment grade bond market, especially the first three trades this week,” said Dan Mead, head of investment grade syndication at BofA Securities. “What we have seen is a slight capitulation from issuers that interest rates will likely remain high for an extended period of time, with low expectations that we are likely to see significant interest rate declines in the near term. I think so.”
“We had a pretty decent reception here last week,” said Lale Basilado, managing director of BNP Paribas' leveraged syndicate desk. “I think investor optimism is shifting to, 'Well, it's higher and it's manageable.'” [point of view]”
High-yield borrowers hitting the market this week include healthcare group Organon, which sold $1 billion worth of bonds to pay down term loans, while oil and gas producer Hilcorp sold $500 million worth of bonds. will sell its corporate bonds and use a portion of the proceeds to repay the debt. Payments company Block has issued $2 billion worth of bonds in a deal that expands in size.
IT company Presidio's bond size increased from $500 million to $750 million after $250 million was transferred from a concurrent financing agreement that ultimately totaled $1.85 billion. The proceeds were used to fund private equity firm CD&R's acquisition of a majority stake in Presidio from BC Partners.
In investment-grade markets, where borrowing has gotten off to a particularly strong start this year, bond deals to be priced this week include a $5 billion offering from pharmacy giant CVS, a $3 billion offering from Coca-Cola, and a $3 billion offering from Italy. It included a $2.25 billion offering. Energy company Eni. Broadband and cable company Charter Communications sold $3 billion in bonds as part of a term loan prepayment and stock buyback financing.
Still, market participants suggested the pace of issuance could start to slow.
“We've had record issuance through the first quarter, and of course there was this turmoil last week,” BofA's Mead said. “Our expectation remains that this is primarily a front-loading of issuances, which means the second half of 2024 will be quieter.”
BNP's Basilad said “issuers are getting smarter” in taking advantage of opportunities in the lower-rated sector. “When that window opens, knock on it.”
Many new issues are responding to strong demand from investors, compressing spreads and lowering borrowing costs compared to Treasuries.
The average spread on U.S. high-yield bonds narrowed to its lowest level since 2007 on Monday, hitting 3.03 percentage points, according to Ice BofA data, but widened as issuance increased. Average investment-grade spreads narrowed to just 0.88 percentage points, the lowest level since late 2021 and just shy of the lowest level since 2005.
Adam Abbas, head of fixed income at Harris Associates, said the spread tightening is a “strong technical” and “an argument that many believe the Fed can get through this problem by lowering inflation without fundamentally changing economic conditions.” “This reflects a combination of 'increased confidence.'
