Outlook 2020: High-grade bond supply to decline for third year; merger funding needs drop

By Cristal Cody

Tupelo, Miss., Dec. 31 – Investment-grade bond issuance remained strong in 2019 but posted lower volume than in 2018 with further declines expected in 2020.

Bond volume came to $1.13 trillion by early December, down from $1.15 trillion in 2018.

The total investment-grade corporate market, including $25-par preferred stock, posted volume of $1.17 trillion by mid-December, down 1.78% on the year but with an upsized surprise versus 2019 estimates, said Ron Quigley, author of ‘Quigley's Corner’ and head of fixed income syndicate, primary sales and senior FIG/Utilities banker at Mischler Financial Group Inc., the nation’s oldest service disabled veteran broker dealer.

“Last year, we surmised that IG Corporate issuance would drop off by a 6.25% decline,” he said. “Down 6.25% vs. down 1.78% for IG Corporate-only issuance is a nice swing of 4.47%. However, the other side of the coin is that we were down on the year vs. last year making it the first time in I believe two decades or more that we have ever seen annual IG Corporate issuance drop in consecutive years from the prior.”

Including sovereign, supranational and agency volume, the high-grade primary market saw $1.39 trillion of issuance through mid-December, down 3.27% from 2018 volume, according to Quigley.

Volume in 2019 was boosted in large part by record issuance in September.

“From my seat in banking and syndicate I'd have to say we have to thank the month of September for its substantial $164 [billion] in IG Corporate supply and $207 [billion] including SSA issuance,” Quigley said. “It was by far and away 2019's most robust month and contributed a total of 14% of the 2019 IG Corporate new issue volume total.”

Investment-grade supply is mostly predicted to decline about 5% in 2020, syndicate sources report.

“The average syndicate desk projects a decline of 3.77% in 2020 vs. 2019 but January and, in fact, the first four months of 2020 should, as usual, see a bulky amount of issuance,” Quigley said.

New supply is expected to pick up quickly in January with $115 billion to $125 billion of issuance expected, according to syndicate sources.

Annual volume is forecast to hit $1.2 trillion on a bull cycle or decline to as much as $920 billion on a bear run, according to Wells Fargo Securities LLC analysts.

Morgan Stanley & Co. LLC analysts also expect nearly $1.2 trillion of issuance in the investment-grade bond market.

“We tread cautiously in U.S. credit, forecast wider spreads, and retain a strong up-in-quality bias,” Morgan Stanley analysts said in a research note.

In 2020, gross high-grade issuance is predicted to decline $50 billion, or 4%, to $1.14 trillion and post a 21% decline in net supply to $399 billion, the lowest since 2012, according to BofA Securities Inc. global research analysts.

M&A volume dips

Mergers and acquisitions-related issuance fell to $192 billion in 2019 after a near record total of $271 billion 2018 and is projected to decrease slightly to $180 billion in 2020, according to Morgan Stanley.

“2019 was still a strong year for M&A, although activity has declined off the peaks reached in 2015 and 2018,” the Morgan Stanley analysts said. “Five deals priced that were larger than $10 [billion], totaling $105 [billion] of supply alone, with deals of $5 [billion] or more bringing the total to $130[billion].”

AbbVie Inc. priced the year’s largest deal and the fourth largest high-grade bond offering on record when it priced a $30 billion 10-tranche offering of senior notes (Baa2/A-) on Nov. 12 to fund its acquisition of Allergan plc.

Merger deal supply in 2020 should be manageable, sources note.

“Although there will be M&A activity, the macro environment likely remains one with elevated political and economic uncertainties which tend to dampen activity,” BofA analysts said. “Also, the financing mix has skewed more toward equity given the pushback against leverage.”

Potential buyers are likely to wait-and-watch amid uncertainty about the outcome of the presidential election and trade negotiations, S&P Global Ratings said in an outlook report.

“While global M&A activity slowed, deals in the U.S. crossed $1 trillion in Q3 and are poised to end the year at the levels seen in 2018,” S&P said. “While we expect M&A activity to remain high in sectors such as health care and pharmaceuticals due to increasing level of disruption, the deal volume in 2020 is likely to dip, given the cautious environment in corporate boardrooms.”

A potential investment-grade senior secured bond offering from T-Mobile U.S. Inc. to fund its acquisition of Sprint Corp. remains the biggest factor for the telecom space in 2020, market sources report.

The Federal Communications Commission approved the deal in 2019, but the company had continued regulatory hurdles to cross with a legal suit by state attorneys general set for a Dec. 9 court date.

T-Mobile held a roadshow in the U.S. and Europe markets April 30 through May 8 via Barclays, Deutsche Bank Securities Inc. and Goldman Sachs & Co. LLC.

A possible secured bond deal size is projected in the $19 billion range.

“We believe tech will continue to lead the overall TMT supply calendar in 2020, likely above $100 billion,” Wells Fargo analysts said.

Yankee supply declines

In 2019, Yankee issuance declined to $239 billion through the first 11 months from $331 billion in the same period in 2018, BofA analysts said.

Yankee supply in 2020 is expected to decline $50 billion in 2020.

Corporate Yankee bond volume fell $34 billion in 2019, and financial supply was down $57 billion.

Green bond issuance took off in 2019 with bonds priced for environmental, sustainable and social projects.

Volume jumped to $19.7 billion across 33 tranches, more than double the $7 billion issued across 12 tranches in fiscal year 2018, BofA analysts said.

Financials continue to dominate at 43% of overall green bond issuance in 2019, followed by industrials at 32% and utilities with 28%, according to the BofA analysts.

REIT issuers also took advantage of low yields by more than doubling borrowing in 2019 to $34.4 billion in the first three quarters of 2019, up from $13 billion in the same period in 2018 and $18.6 billion on average for the prior five years, the BofA report said.

More subdued REIT supply is predicted in 2020 with a 20% drop in volume.

In 2020, U.S. non-financial gross issuance is forecast to fall 2.5% to $571 billion, according to Morgan Stanley analysts.

Financial gross supply also is predicted to mostly decline 2.5% to $223 billion in 2020, on continued lower bank issuance.

“Assuming that the pace of tenders does not dry up entirely and a usual volume of calls persists, net issuance after M&A, calls, and tenders will likely be similar to 2019,” the Morgan Stanley analysts said.

ESG criteria on upswing

Some factors that will impact the bond markets in 2020 include a weakening U.S. dollar and slowing U.S. growth.

In addition, the use of ESG criteria for high-grade bonds is expected to rise in 2020, market sources report.

“Issuers gain clear economic benefits from issuing ‘green’ bonds, in part due to greater reporting requirements while aligning with a company’s wider corporate strategy targeting environmental issues and increasing market share,” Quigley said.

With ESG principles “gaining traction and a growing green-bond friendly investor base,” volume could double to $30 billion to $40 billion in 2020, according to the BofA analysts.

Moody’s Investor Service said the backdrop remains attractive for investment-grade companies to issue debt in 2020, with modestly wider spreads and range-bound rates likely to continue providing low coupons.

Investment-grade credit spreads were ending 2019 tighter, buoyed by a phase one deal with China that averted additional tariffs set to take effect on Chinese imports in December and less uncertainty surrounding Brexit following prime minister’s Boris Johnson’s election victory.

“After the disorderly sell-off late last year, credit markets are on track to close 2019 with double-digit total returns,” Morgan Stanley analysts said. “As much as the tone seems different from late 2018, the ride this year has not been smooth by any means.”

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