Decade-Long High-Grade Bond Binge May Come to an End in 2019

(Bloomberg) -- It may be the end of an era. If all the pieces that suppressed U.S. investment-grade corporate bond issuance in 2018 remain in place, what has been a decade of heavy bond sales could come to an end in 2019.

Borrowers sold nearly $1.1 trillion of bonds in 2018, just short of 2017’s record $1.2 trillion. Analysts expect some of the main drivers of the decline -- corporate repatriation of cash, borrowing costs rising off of record lows, and broader uncertainty, somewhat offset by strong M&A-related supply -- to persist in the new year, affecting some sectors more than others.

Decade-Long High-Grade Bond Binge May Come to an End in 2019

Against a backdrop of volatile equity markets, rising Treasury yields, trade wars and turmoil in Washington, 2018 was the worst year for the U.S. high-grade bond market in a decade. As the market posted negative returns, credit spreads -- the risk premium on investment-grade debt -- widened 59 basis points and the cost to protect against default nearly doubled.

Decade-Long High-Grade Bond Binge May Come to an End in 2019

Here are the sectors that surprised and disappointed in 2018, and key trends to look out for in 2019:

Surprises

Health care. This sector was among the few that saw an uptick in supply in 2018 (about a 90 percent increase), mostly driven by strong M&A activity. M&A in this sector produced some of the largest deals of 2018 in investment grade -- $40 billion for CVS Health Corp.’s purchase of Aetna Inc., $20 billion for Cigna Corp.’s acquisition of Express Scripts Holding Co., and $15 billion for Bayer AG’s acquisition of Monsanto Co., to name a few. Analysts at Wells Fargo & Co. expect another active year in M&A in 2019, particularly within pharmaceuticals, but look for total supply across the sector to fall.

Decade-Long High-Grade Bond Binge May Come to an End in 2019

Retail. Supply increased about 13 percent in the retail sector in 2018, also partially thanks to M&A. Walmart Inc. printed $16 billion -- the sector’s largest deal of the year -- to fund its acquisition of Flipkart. Wells Fargo analysts predict a 38 percent decline in issuance for this sector in 2019, and expect that most new supply will fund debt refinancing and shareholder returns.

Disappointments

Technology. Tech companies priced about $18 billion of supply in 2018, falling more than $100 billion short of 2017’s number. Strategists at JPMorgan Chase & Co. attribute the decline to tax repatriation, changes in tax laws that left several companies flush with cash. Notably, some of the sector’s biggest players -- Apple Inc., Microsoft Corp., Oracle Corp., Broadcom Corp. and Qualcomm Inc. -- were absent from the primary market in 2018. Look for moderate issuance in this sector in 2019, as companies continue to benefit from repatriation.

Telecommunications. A few large transactions drove telecom supply in 2017, setting it up to disappoint in 2018 -- and it did. Issuance fell 51 percent in 2018, lacking the $50 billion in supply provided by AT&T Inc. and Verizon Communications Inc.’s M&A-related funding in 2017. CreditSights says that technology, media and telecom (TMT) supply could be a “wildcard” next year, with M&A having the potential to add as much as $50 billion.

Decade-Long High-Grade Bond Binge May Come to an End in 2019

Financials. Financial issuance, which accounted for more than 40 percent of total investment-grade supply in 2018, fell about 13 percent, largely driven by a more than $50 billion drop in bank and diversified financial services supply and a $15 billion drop in REIT supply. CreditSights analysts look for an 8 percent decline in financials supply in 2019, and anticipate that refinancing will be a large driver of issuance. Strategists at Wells Fargo expect a 10 percent decline in REIT issuance in the new year.

Looking Ahead

  • Strategists at Bank of America Corp., CreditSights, JPMorgan and Wells Fargo look for U.S. high-grade supply to fall in 2019, anywhere between 6.5 percent to 10 percent
  • CreditSights expects TMT to bring more supply year-over-year in 2019, while issuance in most other sectors will fall
  • JPMorgan, Bank of America expect lower overall supply to be partially driven by less M&A, higher funding costs, repatriation of cash
  • JPMorgan lists trade uncertainties, less economic optimism as reasons for lower M&A activity in the new year. “The worst thing for M&A is uncertainty,” Bob Saada, PricewaterhouseCoopers LLP’s head of U.S. deals, said on Bloomberg TV last week

Note: Supply data covers syndicated SEC Registered and 144a USD-denominated, IG-rated bonds sold in the U.S. with a maturity of at least one year; $25par preferred share and SSA/EM deals are not included. Issuance stats are based on information compiled by Bloomberg News.

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