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

(Bloomberg) -- Funding costs will continue to encourage corporate debt sales this week, but the Federal Reserve will have an out-sized influence as credit players focus on its Wednesday interest rate decision.

Borrowers may try to get ahead of the FOMC event and front-load deals, or pause sales as they weigh just how large an expected rate cut will be. They may also wait for a jobs report on Friday.

Corporate earnings season rolls on and although most household names have disclosed quarterly results, BlackRock Inc. estimates 40% of publicly-traded high-yield companies are scheduled to report.

In investment-grade bond sales, dealers are calling for another busy week after the market rebounded in a big way. They’re anticipating $30 billion in new deals after last week’s $26.5 billion tally exceeded an estimate of $20 billion, following a woeful miss in the prior period.

Potential borrowers will be emboldened by recent strong performances, where companies paid low new-issue concessions and were able to increase bond offering sizes mid-syndication. In addition, investors flush with cash have had less to pick from, meaning sellers hold sway on pricing.

Read more: ‘High’ Times Continue in the Primary Market for Corporate Borrowers

Life After Libor

Financial names will be worth watching as a handful already started to test out what life looks like after the Libor benchmark disappears. BB&T Corp., Bank of Montreal and M&T Bank Corp. offered perpetual preferred notes that will reset off of five-year Treasuries last week.

JPMorgan Chase & Co. also sold a similar note, but will index its offering using the Secured Overnight Financing Rate , or SOFR, a lead candidate to succeed Libor. A few lenders have yet to issue debt post-earnings and they may experiment with this structure in the coming days.

On the M&A front, T-Mobile US Inc. secured the U.S. Department of Justice go-ahead for its $26.5 billion takeover of Sprint Corp. The mobile phone carrier met with bond investors in April but was said to be waiting for regulatory clearance before moving ahead with the jumbo debt financing. While it won Federal approval, a lawsuit by a group of states still remains in the way.

High-Yield

Investors have also been clamoring for junk bonds. Last week, Citgo Holding Inc. raked in orders of more than $4 billion for its $1.37 billion note sale, while Midcontinent Communications boosted its deal size to $350 million after netting orders of more than $950 million.

Although the volume of new high-yield bonds fell last week, this month has already been the busiest July since 2014, according to data compiled by Bloomberg. Borrowers are being lured as spreads tightened by 17 basis points and cash poured into high-yield retail funds.

Looking ahead, analysts at Bank of America Corp. expect the hunt for media-related U.S. high-yield debt to continue. Because companies from the cable and telecom industries are heavily reliant on domestic revenue sources, they’re relatively insulated from the Washington-Beijing trade war:

“These are the exact characteristics of what people are looking for in this environment, and so cable, media assets are in very high demand and we expect them to continue to stay that way” -- BofA strategist Oleg Melentyev in a July 22 interview.

Leveraged loans have also been in demand. Borrowers accelerated timing on several offerings and tightened pricing on at least nine, the most in any week since mid-October. The launch of 14 deals took July’s tally to $32.1 billion, making for the third-busiest month of the year.

This bodes well for WestJet Airlines Ltd. when it kicks off with an investor meeting for its $1.96 billion term loan Monday. The deal is to help finance its buyout by Onex Corp.

Also see: Loans on a Roll as High-Yield Rallies to New Record

Sounding Caution

Some are sounding more caution on corporate credit. Hedge fund manager David Einhorn’s Greenlight Capital has taken a new macro position on the debt, betting against both investment-grade and high-yield. Einhorn cites rating agencies’ complacency and signs of a slowing economy for the move.

Others have flagged their concerns. JPMorgan Asset Management’s Bob Michele said last month that it was time to sell and tilt to safer debt, while Pacific Investment Management Co.’s Scott Mather called the market “probably the riskiest ever” back in May.

--With assistance from Polina Noskova, Caleb Mutua and Lara Wieczezynski.

To contact the reporter on this story: Allan Lopez in New York at alopez11@bloomberg.net

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

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