Citi Sees Corporate Issuance Torrent Ebbing as Election Nears

(Bloomberg) -- Corporate investment-grade debt sales are likely to slow significantly in the second half as issuers sit out election volatility after a record spree, according to Citigroup Inc.

Blue-chip U.S. companies have raised substantial liquidity to face the coronavirus pandemic and lack other reasons to sell more bonds, said Peter Aherne, head of North American investment-grade capital markets, syndicate, and capital strategy and structuring at Citi.

“I would expect volumes to taper off, and taper off perhaps considerably, as we get deeper into the year,” said Aherne in a telephone interview on May 15. “M&A has been largely dormant, share repurchase activities have largely been curtailed. The natural drivers of volume are subdued,” he said.

Companies issued about $940 billion of investment-grade bonds in the year to May 19, 90% ahead of the same period in 2019, according to data compiled by Bloomberg. April was the busiest month on record, with more than $300 billion sold.

“If you talk to many of the borrowers, they’re sourcing liquidity to take them to the end of 2020 -- and in some cases into 2021 -- naturally suggesting the absence of a significant up-tick in economic activity,” said Aherne.

There’s also operational fatigue across the industry amid an issuance deluge spurred on by the Federal Reserve’s decision to support corporate debt markets, Aherne said.

“We could certainly use a break,” he said. “It’s been an extraordinary pace of activity and the fact that it’s all taking place while the entire buy side and sell side are essentially working from home only adds to the extraordinary nature.”

Citi itself has taken advantage of the wide open market for issuers. A debut $1.5 billion dollar-denominated green bond priced on May 7 may pave the way for more social and environmental debt sales.

“You can absolutely expect that we will continue to be active in these types of initiatives,” said Aherne.

Meanwhile, Citi’s health care and medical technology clients looking at raising funds to address the impact of the virus “can incorporate ESG technology in their financing,” said Aherne.

Taking Profit

Exxon Mobil Corp., McDonald’s Corp., Starbucks Corp., Walt Disney Co. and Target Corp. were among large corporations offering bonds at elevated spreads that “had never been seen before,” presenting a “once in a lifetime opportunity” for investors to buy investment-grade at junk spreads, said Aherne. This included non-traditional buyers, he added.

“The demand dynamic obviously was quite strong and enabled us to sell a significant amount of securities,” Aherne said. “A number of these investors have already exited their position. They bought the bonds, watched them rally a hundred basis points or more, and they’ve since sold.”

All of this issuance is not without longer-term risk, however, Aherne concedes.

“To the extent that the depth and the duration of the downturn continues to be potentially deeper and longer than we all expect, one would expect credit- and ratings-related risks,” he said.

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