U.S. July High-Grade Credit Supply Expected to Slow

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Syndicate desk estimates for U.S. investment-grade bond supply in July are centered around $90 billion, as funding costs remain extremely attractive for issuers.

While that’s a slowdown from the more than $112 billion which priced in June, investors shouldn’t expect a full-on summer supply lull. The tightest high-yield and investment-grade corporate bond spreads in decades suggest U.S. companies have a growing incentive to issue debt over the coming months rather than wait until later in the year.

Treasury yields also remain low, and the spread differential between U.S. junk and high-grade bonds this week fell to 184 basis points, the lowest since July 2007. That’s creating plenty of reasons for both high-grade and junk issuers to keep borrowing.

Bank of America Corp. strategists are calling for $15 billion to $20 billion of high-grade supply in the coming holiday shortened week. They see potential for issuance to slow in the second half of the year because it was so heavy year-to-date -- but they also note the attractive funding conditions.

“Demand creates supply, and the combination of historically low yields and spreads at post-crisis tights may attract opportunistic issuance,” strategists led by Hans Mikkelsen wrote in a report Thursday.

Still, it won’t be easy to match the nearly $800 billion of high-grade bonds sold so far this year in the second half.

“I would expect new issuance to moderate this year to more normalized level of around $1.2 trillion to $1.4 trillion,” Monica Erickson, head of investment-grade corporates at DoubleLine Capital, said in a live Q&A on the Bloomberg Terminal on June 29.

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In U.S. leveraged loans, Verizon Communications Inc.’s media division is tapping the market to fund its $5 billion leveraged buyout by Apollo Global Management Inc. Verizon Media is selling two new loans totaling $1.5 billion. A lender call is scheduled for July 8.

Another lender call is set for Tuesday for KKR & Co.’s $1.65 billion term loans to help finance its acquisition of Atlantic Aviation.

At least two loan deals have commitments due next week.

A huge pipeline of loans funding acquisitions and buyouts is expected to bring even more sales in the quarter ahead, after June saw the most loan launches in three months. $529.9 billion in loans have launched this year through June, making it the biggest half-year since 2017, according to data compiled by Bloomberg.

The junk-bond pipeline is quiet heading into the new week.

In distressed debt, GTT Communications Inc. has a forbearance agreement with its lenders set for July 6. The company has been in ongoing negotiations with creditors around a potential bankruptcy filing and recently de-listed its stock from publicly trading on the NYSE after it failed to restate its financials on time.

Sequential Brands Group faces its own deadline on July 8 when an extended waiver to deliver first quarter financials expires.

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