M&A bond supply whispers continue; IG deal forecast thins; interest in longer debt up

By Cristal Cody

Tupelo, Miss., Nov. 17 – Additional funding for mergers and acquisitions is expected to boost the year’s investment-grade bond total before 2023 closes.

Overall deal volume hit more than $30 billion this week with $7.5 billion coming from two issuers using the funds to complete mergers.

Tapestry Inc. priced a $4.5 billion five-part senior notes offering (Baa2/BBB) on Wednesday to help fund its $8.5 billion acquisition of Capri Holdings Ltd. for $57.00 per share.

Carrier Global Corp. priced $3 billion of dollar notes as part of a multicurrency bond deal (Baa3/BBB/BBB-) on Wednesday with proceeds to be used to help fund the cash portion of the acquisition of the climate solutions business of Viessmann Group GmbH & Co. KG.

In the week prior, heavy bond issuance included a $5.5 billion five-part M&A-related financing deal from Roche Holdings, Inc.

“That really helps boost supply, but there’s still chatterings of M&A financings that need to get done before the end of the year,” an informed source said.

Adobe Inc. remains in the potential deal pipeline with its $20 billion acquisition of U.S. Figma Inc. that was anticipated to close in 2023 facing scrutiny from regulators, according to market sources.

Kroger Co. is expected to potentially hit the primary market as early as January with around $10 billion of bond offerings to help finance its $25 billion cash acquisition of Albertsons Cos., a source said.

A long-expected debt offering from Microsoft Corp. after the company closed its $69 billion cash acquisition of Activision Blizzard Inc. on Oct. 13 remains in the pipeline.

On Tuesday, Microsoft announced the final results of its Oct. 16 exchange offer for outstanding notes issued by Activision Blizzard for up to $3.65 billion of new notes issued by Microsoft and cash.

Final settlement was expected on Thursday.

The expected funding deal has been in the pipeline for nearly two years, but there still is a chance it may print before the end of 2023, a source said.

Microsoft is “cash rich,” the source noted.

No M&A-related high-grade issuance was priced in October after $11.5 billion of related notes were issued in September, according to a BofA Securities report.

Strong post-holiday action

The week from Nov. 27 through Dec. 4 is expected to be crucial in terms of issuers that have been waiting in the wings, a syndicate source noted.

“People have a strong tendency to get deals done prior to the year-end holiday slowdown,” the source said. “They’re well aware of how big the avalanche is going to be in terms of new issuance in January. That’s typically one of the top two busiest months of the year. It’s not smart for smaller issuers to elbow with big M&A transactions.”

In fact, some originally planned new year high-grade bond supply might hit the primary market ahead of the Federal Reserve’s Dec. 12-13 meeting if market tone continues to improve and rates decline, according to market sources.

Treasury yields fell this week after the Labor Department reported Tuesday the Consumer Price Index rose 3.2% year over year in October, down from 3.7% in the prior month and below market analysts’ consensus forecast of 3.3%.

The 10-year benchmark note yield finished Friday 4 basis points lower at 4.44%, down from 4.63% on Monday and in the same session a week ago.

Additional rate hikes that could impact high-grade corporate spreads seem less likely following the softer-than-expected CPI report, sources said.

“The spreads will probably stay the same on corporates,” one market source said. “I don’t see any change there. We’ve started to see some investing into a little bit longer securities. Not a ton, but a little bit.”

Most of this week’s high-grade corporate issuance was seen in two-, three-, five- and 10-year tranches, but both Carrier Global and Bayer US Finance LLC priced 30-year bonds as part of their multiple-part transactions.

Looking to next week, high-grade deal volume is expected to be sparse in front of the Thanksgiving Day holiday.

About $5 billion to $10 billion of supply is forecast with issuance likely packed into the first two sessions of the upcoming short market week, sources said.

ETF inflows continue

Short-term corporate investment-grade debt funds/ETFs posted outflows over the past week ended Wednesday of $464 million, according to Refinitiv Lipper U.S. Fund Flows.

Outflows year to date total $25.53 billion.

Looking at high-grade bond funds and ETFs, including corporates, agencies, mortgages and Treasuries, inflows fell to $1.35 billion over the week ended Wednesday from a $3.21 billion inflow in the prior week, according to a BofA Securities note released Friday.

High-grade ETFs made up the bulk with continued inflows of $2.63 billion during the period, down from $4.13 billion a week earlier.

Funds flows turned negative with $1.28 billion of outflows, up from $920 million of outflows in the previous week.

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