Re-energized new issuance and a looming debt wall
admin | January 17, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Volatile spreads at year-end contributed to a December that was light on new issuance. The rebound in January coupled with a change in tone by the Fed has fueled an overall positive market response, increasing demand for new issuance and, in particular, creating opportunities in the BBB category. Longer term the corporate debt outlook shows a maturity wall building over the next five years, with the technology, consumer products and utility sectors having the greatest need to tap the markets.
Calmer markets re-open the door for issuers
Volatile spreads at year-end contributed to a December that was light on new issuance relative to the year-ago period, with $8.6 billion Dec-18 versus $28.9 billion Dec-17. January has led off with a rebound in equities and a consolidation in credit that has contributed to calmer markets, and the investment grade new issue market is back up and running. The recent change in tone by the Federal Reserve has helped to fuel an overall positive response to new issuance, particularly in the BBB category. ABIBB tapped the market for $15.5 billion in order to fund a $16.5 billion tender offer, while the Fox Corporation (Baa2/BBB – the broadcast/cable assets being spun from 21st Century Fox) issued $6.8 billion to fund the dividend to its parent. Both deals were oversubscribed and launched 15 to 20 bp from initial price talk. Even names that rarely come to market, such as Steelcase (SCS – Baa2/BBB), followed ABIBB’s example and tapped the market to redeem its 6.375% 2021 notes. Demand was good and led SCS to upsize the deal by $50 million, to $450 million, while launching 25 bp tighter (at +250 bp) than initial price talk.
Debt wall building over next five years
Over the next five years, roughly $3.14 trillion of investment grade corporate debt and $1.52 trillion of high yield corporate debt will mature. Of those years, 2021 and 2022 have over a trillion maturing. With the potential for a pause in rate rises, more companies may look to take advantage of the current positive rate environment and push out maturities, similar to the debt/tender offer that ABIBB executed last week.
Exhibit 1: US corporate debt maturing
Source: S&P Global Fixed Income Research
Technology names likely to lead the charge
On a sector basis, technology has the most debt maturing over the next five years with roughly $329 billion coming due, followed by consumer products ($248 billion) and utilities ($224 billion). Some of the larger technology names that have a considerable amount of debt maturing this year, including Apple (AAPL – Aa1/AA+), Cisco (CSCO – A1/AA-), Microsoft (MSFT – Aaa/AAA/AA-) and Oracle (ORCL – A1/AA-(n)/A(n)) were all absent from the new issue market in 2018. CSCO actually has not tapped the debt market since 9/13/16. A large portion of the debt maturing will likely be refinanced versus repaid as ratings for the aforementioned names are all relatively stable. IBM (A1 (*-)/A (n)/A (*-)) has roughly $6.6 billion maturing this year and will need to issue an additional $20 billion of new debt to fund their purchase of Red Hat, which is expected to close by year-end.
Exhibit 2: Nonfinancial US investment grade corporate maturities by sector
Source: S&P Global Fixed Income Research
With respect to the consumer products sector, more of these names are expected to repay versus refinance upcoming maturities given the recent spate of M&A activity that has stretched credit profiles. Names like Newell Brands (NWL – Baa3 (n)/BBB-/BBB- (n)), Keurig Dr. Pepper (KDP – Baa2 (n)/BBB) and Campbell Soup (CPB – Baa2 (n)/BBB-/BBB (n)) are all in debt reduction mode. These names are likely to use maturing debt as a mean for debt reduction.
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