U.S. High-Grade Sales, Large LBOs to Ramp Up

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U.S. primary debt markets will be wide open next week as investors take the news in stride that the Federal Reserve will begin selling its portfolio of corporate bonds purchased through an emergency lending facility during the pandemic.

Investment-grade bond supply is expected to ramp up for the rest of the month, after $20.25 billion sold in the holiday-shortened week. June estimates are centered around $110 billion of fresh supply. In riskier new issues, monster leveraged buyouts are coming back and bringing sizeable deals to the leveraged loan market with them.

Citigroup Inc. strategists say the Fed’s presence will continue to be felt by corporate credit markets, even as it formally exits its small corporate bond holdings.

“The primary and secondary-market credit facilities stand as a blueprint for future shocks,” strategists led by Daniel Sorid wrote. “The Fed thus retains an invisible presence in the corporate bond market that investors value at 30 basis points or so at the index level.”

Risk premiums barely moved after the Fed’s announcement this week with the decision to unwind the program being “another sign of the strength of the corporate bond market, not a signal of a wider view on tapering across asset classes,” according to Barclays Plc strategist Brad Rogoff.

High Yield

The leveraged finance market will kick off next week with a lender call Monday for Culligan International Co.’s $2.25 billion term loans to finance its buyout by BDT Capital.

A call is also set Monday for Quikrete Holdings Inc.’s $1.5 billion term loan that was postponed in April. Commitments are due June 10 for the loan, which will partially finance the concrete supplier’s acquisition of Forterra Inc. Hertz Global Holdings Inc. is reaching out to investors next week with $1.65 billion of term loans to finance the car rental company’s reorganization plan.

The U.S. high-yield bond pipeline is quiet going into the week. The riskiest segment of the junk market, CCCs, have been resilient recently, even in the face of outflows from retail funds. A steady rally for CCCs could continue to embolden riskier issuers to issue new debt, like Canadian airplane manufacturer Bombardier Inc. which was able to boost the size of its new bond sale this week.

Eyes will be on AMC Entertainment Holdings Inc.’s C rated debt, which has been getting a blockbuster boost from the retail stock trading mania. Its 12% second-lien bonds rose above par this week, a stunning comeback from their low of just 5 cents on the dollar last November.

Retail investors are continuing their streak of adding money to high-grade funds and pulling it from high yield. U.S. corporate investment-grade funds reported inflows of $1.72 billion in the week ended June 2, according to Refinitiv Lipper. Junk funds saw outflows of $384.7 million.

Within distressed debt, Sequential Brands Group, the owner of brands including Jessica Simpson, has a default waiver until Tuesday, June 8 when it’s required to deliver first-quarter financials. Washington Prime Group’s forbearance agreement expires the following day on June 9, pending another extension for the mall operator.

©2021 Bloomberg L.P.

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