Investment-grade supply thin; new issue coupon rates on the rise; secondary spreads weaken

By Cristal Cody

Tupelo, Miss., July 15 – The week’s investment-deal volume was led by Yankee financial issuance and rising coupons.

Just slightly more than $10 billion of high-grade corporate paper printed, falling short of expectations of about $15 billion to $20 billion of issuance.

Volume was led by Yankee bonds with focus shifting to U.S. financial supply in the week ahead following the release of major banks’ second-quarter earnings results this week and next week, sources said.

Issuers skipped bringing any new deal to the primary market entirely on Wednesday in the face of runaway inflation data from the Labor Department.

The Consumer Price Index jumped 9.1% over the past 12 months in June, outpacing forecasts of an 8.8% rise in inflation.

High-grade issuers that did price faced high coupons normally found in the junk market and higher than when the issuers were last in the primary market, sources said.

That’s par for the course, with utility credit spreads and high-grade indexes moving out, along with the credit landscape, a source noted.

Utility spreads have widened to a current sector average of Treasuries plus 169 basis points, while the S&P investment-grade composite spread is averaging Treasuries plus 176 bps.

High-grade outflows have been large lately with Refinitiv Lipper U.S. Fund Flows reporting outflows of $2.99 billion from corporate investment-grade funds for the past week ended Wednesday.

Net outflows year to date total $77.02 billion.

“So, overall this is the trend, especially with inflation on the rise and a 75 bps rate hike expected at the July 17 FOMC Meeting,” a market source said. “When rates go up, prices come down.”

New issues

In the week’s new offerings, BPCE SA sold $1.75 billion of senior preferred notes (A1/A) in two parts on Monday, pricing a five-year note with a 4.75% coupon and a tranche due in 2033 with a 5.748% coupon.

The Paris-based financial services company previously tapped the primary market in January with a $2.05 billion three-part offering of notes. That deal included floating-rate notes and fixed-rate tranches due in 2025 with a coupon of 1.625% and in 2037 with a 3.648% rate.

Mitsubishi UFJ Financial Group, Inc. also came to the primary market Monday with $4.5 billion of notes (A1/A-) in four tranches. The deal included a three-year floating-rate tranche and a three-year fixed-rate note with a 4.788% coupon, a six-year issue with a 5.017% coupon and a tranche due 2033 with a 5.133% coupon.

The Tokyo-based bank was last in the primary market with senior callable notes back in April when it sold $2 billion of notes in three parts. In the April 11 offering, the deal included initial fixed-rate coupons on notes due in 2026 at 3.837%, notes due in 2028 at 4.08% and notes due in 2033 at 4.315%.

On Tuesday, Deutsche Bank AG, New York Branch’s $1.3 billion offering, the lone deal of the day, priced with a 6.119% coupon on a senior non-preferred note due 2026 (Baa2/BBB-).

The Frankfurt-based banking and financial services company’s last offering of fixed-to-floating-rate eligible liabilities senior non-preferred notes was on Jan. 4 when it priced $1.75 billion of notes due 2028 with a 2.552% coupon.

Meanwhile, PepsiCo Inc. priced the week’s only non-financial bond offering on Thursday and the company’s first high-grade deal of the year. The company sold an upsized $2.5 billion of senior notes (A1/A+) in three tranches with coupons ranging from 3.6% on the 5.5-year note, 3.9% on the green senior note due 2032 and 4.2% on the 30-year tranche.

The offering was upsized from $2 billion and priced to heavy demand, a source said.

The Purchase, N.Y.-based food and beverage company was last in the market in October 2021 with $3 billion of senior notes that carried coupons of 1.95% on the 10-year tranche, 2.625% on the 20-year tranche and 2.75% on the 30-year bond.

Rates are high, too, across the pond. The Church Commissioners for England announced July 8 that it sold £550 million of Aa1-rated bonds, including a 10-year sustainability bond and a 30-year conventional bond with coupons of 3.25% to 3.625% on the long end.

Investment-grade market conditions are expected to remain challenging over the summer due to inflation and growth uncertainties, according to a BofA Securities Inc. research note this week.

“We estimate secondary spreads for issuers coming to the primary market in 2Q underperformed the index by 3.6 bps,” BofA analysts said in the report. “That was the worst since 2Q-2012.”

The analysts “look for supply to continue impacting secondary spreads negatively in July and potentially into September.”

Light July volume

Deal volume is expected to increase in the week ahead with about $15 billion to $20 billion or more notes likely to print, depending on possible bank supply, sources said.

JPMorgan Chase & Co. and Morgan Stanley reported their second-quarter earnings on Thursday, while Wells Fargo & Co. and Citigroup Inc. reported earnings results on Friday. Bank of America Corp. and Goldman Sachs Group Inc. will release their second-quarter reports on Monday.

Less than $25 billion of investment-grade notes have priced month to date.

Meanwhile, some issuers are looking at their existing investment-grade paper.

“In terms of liability management, I am hearing that many conversations are taking place between bankers, syndicate managers and issuers discussing issuers buying back badly discounted bonds,” a source reported.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.