Outlook 2015: High-grade primary’s momentum to continue into 2015; M&A drives activity

By Aleesia Forni

Virginia Beach, Jan. 2 – The investment-grade bond market saw an onslaught of new issuance during 2014, and sources believe that the pace of the primary will carry into the year ahead.

Predictions for new U.S. high-grade bond issuance during the 2015 calendar year range from $1 trillion to $1.15 trillion.

Sources expect issuance in the year ahead to be front-loaded, with the bulk of new paper pricing during the first months of the new year.

Medtronic, Apple mega deals

More than $1.09 trillion of new issuance was sold during 2014, breaking the record set in 2013 of $1.01 trillion.

This followed the $960.48 billion of high-grade bond issuance seen in 2012.

“We had a great 2014,” one market source said.

September saw the busiest primary market of the year, with Roche Holding AG and Sysco Corp. pricing multi-billion dollar deals during a month that saw more than $130 billion of supply.

December saw an unusually active new issue market, with large mergers and acquisitions financing trades from Medtronic Inc. and with Amazon.com Inc. helping to push the year’s total to record-breaking levels.

“We’ve seen a substantial increase in M&A activity, which should carry over [into 2015],” one market source said.

Medtronic’s new deal set the year’s record for size, with the company pricing $17 billion of bonds in seven tranches.

The new issue “went very well,” one source noted, attracting an order book that was more than 2.5 times oversubscribed, with tranches tightening up to 25 bps compared to initial guidance.

Also this year, Apple Inc. came to market with a whopping $12 billion of new debt sold in seven parts in order to fund repurchases of the company’s common stock and payment of dividends under its expanded program to return capital to shareholders.

The new deal followed the company’s record $17 billion deal priced during the previous year.

Pace to continue in 2015

Most sources predict that supply in the investment-grade bond market will remain steady in the upcoming year following back to back years of record-breaking issuance.

“Expecting another year with more than $1 trillion [of supply],” a market participant said.

“Calling for around a 5% increase in the year ahead,” one market source said.

Another source said that he expects issuance to be “flat to up 2%-3%.”

However, some are not quite as optimistic.

“Maybe down slightly,” a source said, adding that he predicts around $1 trillion of new issuance for 2015.

Market volatility will continue to play a large role in the year ahead.

“The lack of liquidity should be a big story in the credit markets in 2015,” Bank of America analysts said in a note.

“While once sellers were scarce, now many investors are turning to the exits,” the analysts said. “We believe credit volatility will increase – exceeding levels of 2013’s so-called taper tantrum.”

Fed in focus

Most market players expect the U.S. Federal Reserve to begin raising interest rates in the second half of 2015, though the precise time is uncertain.

“The point is, it’s coming,” one source said.

The increase in rates will likely play a role in the year ahead’s market activity.

“As the Federal Reserve increases interest rates, volatility should rise,” Bank of America said in its 2015 outlook.

“We could see a bit of a slowdown with the rate hikes,” one market source said of supply in the year ahead.

The increase will also likely incite lower liquidity and wider credit spreads, according to Bank of America analysts.

“The Fed’s expected rate increase should mark the end of the reach-for-yield era. It should also start a period of underperformance in bonds that have benefited the most from easy monetary policy – including U.S. high-grade,” Bank of America analysts said.

“Once again, the Federal Reserve sets the tune for the U.S. credit markets,” said Hans Mikkelsen, head of U.S. high-grade credit strategy for Bank of America. “As the central bank begins raising interest rates in 2015, we expect a low-return, high-volatility environment.”

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