High-grade bond issuance slows; Microsoft, Broadcom funding deals still in pipeline

By Cristal Cody

Tupelo, Miss., Oct. 27 – Investment-grade bond issuance volume sorely missed expectations for the week with corporate supply not even hitting double digits.

Only $8.3 billion of high-grade notes came to the primary market, including a $2.5 billion two-part deal on Friday from Capital One Financial Corp.

About $20 billion of new issuance had been forecast for the week before Treasury yields shot up on Monday and Middle East conflicts added to risks, sources said.

A heavy round of more than 1,500 corporate earnings releases this week also deluged the market.

All of the week’s sessions saw lone investment-grade corporate issuers and coupons of more than 6%.

Genuine Parts Co. was the only name in the primary market on Monday as the benchmark 10-year Treasury note yield climbed to over 5% during the session.

Genuine Parts’ $800 million two-part offering of notes (Baa1/BBB) only tightened 5 basis points from initial talk, a source said.

The lowest high-grade coupon in the corporate space this week was the 6.338% three-year notes (A2/BBB+) from American Express Co. on Tuesday, while the highest coupon printed was the 7.413% senior notes due 2029 (Baa1/A) from M&T Bank Corp. on Thursday until Capital One’s offering on Friday, sources reported.

Capital One dropped a floating-rate tranche from its final offering. The tranche of fixed-to-floating rate notes due 2031 priced with a 7.624% coupon.

The deal on Friday was a surprise offering going into the weekend following a volatile week, a source said.

The S&P Investment Grade Composite Spread widened 2 bps this week.

Overall supply in October so far has missed forecasts with more than $50 billion of notes sold month to date.

About $80 billion or more was expected for the month, similar to what priced in October 2022, sources said.

Next week, market sources reported they expect about $20 billion of deal volume with the bulk likely front-loaded ahead of the Federal Reserve’s monetary rate decision on Wednesday.

The Fed is expected to keep rates unchanged, a source said.

The volatility in rates isn’t helping the high-grade primary market.

“However, once rates stabilize, technicals should improve rapidly,” according to a new note this week from BofA Securities. “These relatively modest supply volumes have allowed dealer inventories of IG corporate bonds to shrink to the lowest levels since December of last year. That implies limited availability of bonds going forward away from the still lackluster new issue market.”

M&A funding

A long-expected massive funding deal from Microsoft Corp. is still being eagerly awaited after the company closed its $69 billion cash acquisition of Activision Blizzard Inc. on Oct. 13.

The deal was first announced in January 2022 and had been expected to be completed in June.

Market sources are eying a high-grade debt offering before the end of the year.

On Tuesday, Microsoft reported first-quarter revenue rose 12%.

“Detail remains thin on the ground where the Activision deal is concerned,” according to a note this week from Hargreaves Lansdown analyst Sophie Lund-Yates. “The brave new frontiers that come with this acquisition will allow Microsoft to venture beyond the world of PCs and consoles, thanks to names like Candy Crush.”

Because the high-grade offering is expected to be huge – some sources estimate Microsoft will offer about $20 billion to $30 billion of new paper – the deal is likely to come before the holidays, which is not too far off since November starts next week, a source said.

On Oct. 16, Microsoft launched offers to exchange Activision Blizzard notes for up to $3.65 billion of new notes from Microsoft with the early tender deadline set for 5 p.m. ET on Friday.

The tender deadline is Nov. 14.

Another long-expected funding deal from Broadcom Inc. (Baa3/BBB-/BBB-) also remains in the potential high-grade pipeline, a source said.

The company is set to close Monday on its $69 billion acquisition of VMware (Baa3/BBB-/BBB).

Broadcom announced on Aug. 21 that the deal will close on Oct. 30, though the acquisition has a completion outside date of Nov. 26.

The companies reiterated as recently as Oct. 18 that the merger is still expected to close on Monday.

Outflows decrease

Outflows into short-term corporate investment-grade debt funds/ETFs declined to $1.78 billion over the past week ended Wednesday from $2.31 billion of outflows in the prior week, according to Refinitiv Lipper U.S. Fund Flows.

High-grade funds’ net outflow year to date totals $20.8 billion.

Overall outflows into high-grade bond funds and ETFs, including corporate bonds, agencies, Treasuries and mortgages, nearly doubled to $4.52 billion for the week ended Wednesday – the biggest outflow since December 2022, according to a BofA Securities note.

Outflows totaled $2.41 billion in the prior week.

Outflows into ETFs jumped to $2.28 billion this week from $360 million a week earlier, BofA said.

High-grade funds posted higher outflows of $2.24 billion over the week, up from $2.05 billion of outflows a week ago.

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