Corporate Credit Traders to Watch for Taper Announcement at Fed Meeting

(Bloomberg) -- Corporate credit traders will watch for a taper announcement at the Federal Reserve meeting on Wednesday and any indications of a timeline. U.S. high-grade debt sales should pick up next week with about $25 billion of expected supply, while the pipeline for new leveraged loans and junk bonds looks lighter, according to surveys of bank analysts and underwriters. 

Investment-grade borrowers will likely seek to get ahead of the Fed, making the week frontloaded with new issues if the window is open. Interest rates are rising in anticipation that the central bank, which is widely expected to outline plans for tapering its asset purchases, might need to accelerate the process of policy tightening to combat inflation risks. This will help incentivize any issuers with funding needs to go as soon as possible.

Estimates for investment-grade issuance for the full month ahead are around $100 billion, compared with the more than $115 billion sold in October, which was well above the top end of forecasts of $100 billion based on surveys of syndicate desks.

In leveraged loan new issuance, November sales are projected at between $30 billion to $45 billion, according to five Wall Street banks and research desks surveyed by Bloomberg. U.S. high-yield bond volume is expected between $20 billion and $25 billion, according to three of them with another calling for as much as $43 billion.

“Smaller LBO financings and more opportunistic trades such as repricings, add-ons, dividend recaps along with the Thanksgiving holiday will likely see issuance drop by 20%-25% from October levels,” said Art de Pena, head of loan syndicate and distribution at Mitsubishi UFJ Financial Group Inc.

M&A and leveraged buyouts made up just over half of October’s $78.5 billion priced loan volume, according to data compiled by Bloomberg.  

The month kicks off with at least six lender meetings on deck, including the buyout financing for Vantage Elevator Solutions by Ontario Teachers’ Pension Plan Board and some repricings. A $2 billion loan for aircraft lessor AerCap Holdings NV to help fund its acquisition of GE Capital Aviation Services is also due, and follows a recent $21 billion bond sale that was part of the debt package.

High Yield

Junk bonds may have suffered losses recently, but investor demand for new issues remains mostly strong with just select struggling deals such as the $1.1 billion offering for debt-laden Brinks Home.

After about $30 billion of supply in October, the high-yield calendar is light so far with just a couple of deals on the agenda. Among them is porta potty rentals business United Site Services, which is selling a $1.3 billion note and a $1.25 billion leveraged loan to fund its buyout by Platinum Equity. 

“It’ll probably be a robust month for issuance, but unlikely to be a record breaker after such heavy supply this year and with upcoming holidays,” said Nicole Hammond, a senior portfolio manager at Angel Oak Capital Advisors. “But issuers are still going to want to get in front of potential rate increases, and the primary market is open for almost anyone.”

Teva Pharmaceutical Industries Ltd. is also in the market, tapping into growing demand for sustainability-linked debt with a $4 billion debut issue. The bond deal, scheduled to price next week, aims at boosting access to medicines in low and middle-income countries.

Earnings Schedule

The next five trading days will see a flurry of earnings reports from regular issuers of debt.

“So far, they’ve been pretty good with few disappointments. Companies are talking about supply chain issues, and they’re having to do more to access materials and labor, but it’s not having an impact on margins as demand remains strong,” said Hammond.

Avis Budget Group Inc., AMC Entertainment Holdings Inc., CVS Health Corp., KKR & Co., Marriott International Inc., Owl Rock Capital Corp. and T-Mobile US Inc. are among those reporting.

In distressed debt, Sequential Brands Group Inc. has a bankruptcy court hearing on Thursday to consider approving selling Jessica Simpson’s name back to her. That’s the same day LTL Management LLC, the Johnson & Johnson unit put into bankruptcy to halt baby-powder lawsuits, will be in court in North Carolina to ask that the claims against J&J be put on hold.

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