What to Watch in U.S. Corporate Credit Markets This Week

(Bloomberg) -- Primary markets are anticipating a busy week with Occidental Petroleum Corp. likely to offer a jumbo deal to help finance its acquisition of Anadarko Petroleum Corp. There’s one high-yield deal in the pipeline and about $22 billion of leveraged-loan deals currently being marketed, with over half of that expected to price this week as companies wrap up deals before the summer slowdown.

Investment-grade syndicate desks are forecasting $30 billion in new deals for the week, although the sharp sell-off in risk assets Monday may threaten that total. Occidental is expected to sell bonds in the range of $11 billion to $13 billion. The sale -- likely to be the largest bond deal in three months -- comes into a market that started losing steam late last week after the Federal Reserve’s interest rate cut was deemed hawkish and the global trade war escalated.

Junk Bonds Dethroned

The Fed’s rate cut and the tariff headlines are putting investors between a rock and a hard place. Many are still leery of credit risk, and investment-grade bonds have performed better than junk debt this year, while CCC notes have lagged the broader high-yield market. Yet, as bond yields plunge, some corporate debt investors are increasingly willing to hold their noses and lend to riskier companies. High-yield issuance recorded the busiest July in five years with $23.5 billion priced, and CCC rated debt accounted for the highest proportion of issuance since February.

Bankers had been anticipating a continuation of the frenzy in high-yield issuance in August with mostly opportunistic refinancings. It got off to a good start after a rush of drive-by issues last week, but the volatility has made that less certain. Just one deal is in the pipeline for this week so far, a $600 million issue for U.S. Farathane LLC, which kicks off a roadshow on Monday.

There are about $22 billion of leveraged loan deals currently being marketed, with over half of that expected to price this week as companies wrap up deals before the summer slowdown.

Among loans with commitments due are Sedgwick Claims Management Services Inc.’s $1.1 billion incremental loan to finance its York Risk Services acquisition, WestJet Airlines Ltd.’s $1.96 billion LBO loan and DaVita Inc.’s $2.5 billion refinancing.

See also: Leveraged Loans’ BB Exodus Fuels Demand for Higher-Quality Debt

In distressed debt, Barneys New York Inc. has been talking with another lender about financing the luxury chain’s operations if it decides to file for bankruptcy, a move that could come as soon as this week, according to people with knowledge of the discussions.

The secondary market may be on its way to more volatility. Credit spreads are so tight that it will be difficult for the asset class to stay insulated from market volatility going forward, according to Oksana Aronov, head of market strategy for Absolute Return Fixed Income at JPMorgan Asset Management. Credit is already “priced for perfection,” she said on Bloomberg TV Friday. Market liquidity “should be of concern to all credit investors,” according to Aronov.

Investment-grade debt may be a safe haven. The Fed’s first rate cut in a decade and more rate cuts possibly in the pipeline matched the market’s expectations on average and helped form the foundation for Bank of America’s bullish outlook for investment-grade spreads, according to the bank’s credit strategists Hans Mikkelsen, Yuri Seliger and Yunyi Zhang.

“Initial disappointment in risk assets aside, the resulting environment is super-supportive for inflows to the U.S. IG corporate bond market.” the analysts wrote in a note.

--With assistance from Jeannine Amodeo, Natalie Harrison, Lara Wieczezynski and Dan Wilchins.

To contact the reporter on this story: Caleb Mutua in New York at dmutua@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Christopher DeReza

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