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

(Bloomberg) -- The flow of U.S. corporate bond offerings looks set to continue this week, though risk appetite is soured by mounting worries about a deadly virus in China as the holiday shortened week starts.

In the corporate high-yield and leveraged loan markets, last week’s blowout debt sales for the buyout of Presidio Inc. could pave the way for more bonds and loans financing private equity deals.

The $1.4 billion debt offerings got nearly $13 billion in orders across bonds and loans, according to people familiar with the matter who asked not to be identified because the details are private. All debt tranches priced much tighter than originally expected and traded up in the secondary.

Taking a page from Presidio’s playbook, other companies may opt to borrow more in the secured bond market and dial down their plans for getting loans, in response to investor demand. Presidio’s secured notes priced at a lower yield than the company’s new term loan, according to Bloomberg calculations.

“Judging from the performance of new issues in the sector, the market’s appetite for this risk may be reaching its limits,” Bank of America Corp. analysts Oleg Melentyev and Eric Yu wrote in a note Friday.

Positive Sentiment

Sentiment rose following solid earnings from Wall Street’s biggest banks and the completion of a first-phase U.S.-China trade deal. Yields for the riskiest junk bonds have dipped to seven-month lows and loan funds saw inflows for two straight weeks for the first time since November 2018, according to data compiled by Refinitiv. Investment-grade funds, meanwhile, saw a best-ever start in terms of inflows.

The positive market backdrop should help leveraged loan deals that are already in the pipeline and may even encourage private equity sponsors to press ahead with new ones. Loan sales for the buyouts of Cision Ltd., AECOM, LGC Group Holdings Ltd. and MagicLab -- the owner of dating apps Bumble and Badoo -- all have commitments due this week.

Other large deals, including a $6 billion cross-border financing for Froneri International Ltd.’s acquisition of Nestle’s ice-cream business and a $1.5 billion offering for Viagogo Entertainment’s buyout of Stubhub Inc. are also in the market with commitments due later this month.

Tightening spreads have also encouraged companies to refinance or reprice their outstanding debt, helping push the total volume of new leveraged loans launched in January to over $61 billion, according to data compiled by Bloomberg.

Nouryon Finance BV’s, the former specialty chemicals business of Akzo Nobel NV now owned by Carlyle Group, is looking to cut borrowing costs on $4.2 billion of its debt, with commitments due on Thursday. Cable company CenturyLink Inc. is in the market with an even bigger deal: the repricing of a $4.6 billion loan that matures in 2027.

Related: Fearing s Again; Junk Downgrades Rattle: Credit Brief

The U.S. bond market was closed Monday in observance of the Martin Luther King Jr. holiday.

Negative Concessions

About $25 billion of sales are expected in the U.S. corporate high-grade market, a drop from last week’s $35.4 billion, according to an informal poll of primary dealers. While supply remains “pretty typical” for this time of the year, “demand will continue to be really strong,” according to Steve Kellner, head of corporates at PGIM Fixed Income, which manages about $838 billion in assets.

“Many of the deals have started to come at spreads tighter than what the secondary bonds are trading,” said Kellner in an interview. “That’s a sign as to how strong the technicals and the demand are right now.”

Corporate earnings shift to industrials this week with a number of large high-grade borrowers, including Halliburton Co., Johnson & Johnson, Procter & Gamble Co., International Business Machines Corp., Intel Corp. and Southwest Airlines Co. lining up to report and become candidates to sell debt.

Benign profit growth is “acceptable” as borrowers can still generate a lot of cash flow, said Kellner. Stable credit trends and an acceptable economic outlook should also support deleveraging, he added.

Click here for a worksheet of companies set to release earnings this week.

“Those companies are going to generate free cash flow and are going to reduce debt so it’s hard to see a big drop in BBB issuers down to the BBs rank this year,” said Kellner.

The spread on BBB rated corporate bonds dropped on Friday to 119 bps, the lowest since Feb. 28, 2018.

Global leaders in politics, business and culture are meeting at the World Economic Forum when the annual event opens in Davos, Switzerland on Tuesday. With environmental risks accounting for all of the group’s top five long-term concerns for the first time ever, credit investors will be looking out for new information that “could affect social investing going forward,” added Kellner.

The European Central Bank will hold its first policy meeting of the year Thursday, with its president Christine Lagarde expected to reveal the most comprehensive outline yet of the monetary strategic review, according to Bloomberg Economists David Powell and Maeva Cousin.

A review of the central bank’s asset purchases “could include thinking about the maturities of bonds held as well as the type of fixed-income instruments purchased,” wrote the economists in a note last week.

©2020 Bloomberg L.P.

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