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Burst of new issuance creates opportunity as rally stalls

| June 14, 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.

A burst of new corporate issuance proved a mixed bag amidst a fizzling rally in the credit markets. High quality issuers saw launches come 15-20 bp tighter than initial price talk, with impressively flat or even negative concessions, while lower-rated or obscure issuers had a tougher time taking advantage of the recent pop in credit risk tolerance. The new issue activity sopped up much of the market’s liquidity, stalling the rally in the secondary market that had appeared to begin in earnest earlier in June. Recent issues that offer good value to investors on the follow include the Barclays’ Tier 2 11NC10 subs (BACR: Ba1/BB+/A-), which priced at the lower end of their initial range (+300), leaving roughly 20-25 bp of potential tightening before reaching fair value. Also, Aircastle Ltd’s (AYR: Baa3/BBB-/BBB-) $650 million, 7-year bonds launched at +230, and are currently indicated 2-3 bp back. Though a higher-risk issuer than peers AL and AER, Aircastle offers attractive compensation given improvements to their overall credit profile, marked by the achievement of investment grade ratings in 2018.

Active week of new issuance lends market visibility

The week kicked off with a flurry of activity in investment grade (IG) new issuance, led by the anticipated $9 billion Fiserv deal (FISV: Baa2/BBB) to fund their bridge facility for the First Data (FDC) acquisition. The deal had been delayed from the prior week. Whether smart or lucky or both, FISV’s decision to delay proved fruitful, as the appetite for yield was enough to support a very successful launch. Company threats to take a greater portion of the total expected $12 billion deal to the lower-yielding EUR market seemed to have the desired effect in the USD market. New issue concessions were thin on the launch, as the four tranches wound up pricing 15-20 bp tighter than the initial price talk (IPT) levels, and were between 2-4x oversubscribed.

The constructive environment drew out plenty more issuers, with a good portion of the activity among financial names, particularly in REITs, insurance, and a couple of smaller, one-off issues from the big banks. Also FISV, which is technically classified as a tech name in the IG indices, is frequently treated as a financial credit on many trading desks. Through Thursday, $34 billion in IG debt was launched across 44 individual issues, with high yield contributing an additional $4.2 billion across 10 issues. Debt issued included some subordinated paper from the big IG banks, e.g. a $500 million LLOYDS AT1 deal, and a $1.5 billion BACR Tier 2 deal.

Credit rally may be stalling for now

Not every launch was treated as well as FISV, as investors demonstrated far more restraint among higher risk or off-the-run issuers. While higher quality issuers saw launches come 15-20 bp tighter than IPT, with impressively flat or even negative concessions, the lower-rated or obscure issuers had a tougher time taking advantage of the recent pop in credit risk tolerance. Those deals saw launches come pretty close to initial talk levels, with order books that were far less robust than their higher-rated peers, and higher concessions overall for the week. Furthermore, the new issue activity sopped up much of the market’s liquidity, stalling the rally in the secondary market that had appeared to begin in earnest last week.

Exhibit 1: Bank/financial new issues – concession and participation for week of 6/10/19

Source: Bloomberg/TRACE BVAL indications, Amherst Pierpont Securities

The softer recovery was reflected in bond fund flows and positioning in ETFs. Bond fund flows turned positive in the first week of June, but only after outflows and short interest in ETFs had dominated the second half of May. The Bloomberg Barclays IG Index tightened -6 bp off its recent peak of +130 on 6/3, while IG CDX made a ~10 bp move tighter from 5/31 to +60. The stall in trajectory and the severe lack of liquidity in the secondary market suggests much of the initial move may have been more short covering and/or hedging, as opposed to a genuine improvement in risk appetite. Certainly the rate picture and lack of negative headlines in corporates clears the way for potential further tightening; however, the week’s new issue market proved to be far more of a mixed bag for now.

Modest indigestion creating some opportunities

Notwithstanding the market’s apparent decreased risk appetite as the week pressed on, some of these recent issues still offer good value to investors on the follow. The Barclays’ Tier 2 11NC10 subs (BACR: Ba1/BB+/A-) wound up pricing $1.5 billion yesterday at the lower end of their initial range (+300), which leaves roughly 20-25 bp of potential tightening before reaching fair value (Exhibit 2). Undoubtedly this issue could be subject to wider swings than true IG yankee bank paper in volatile markets, but are being initially valued with a discount to where they will likely be trading long-term versus their peer group.

Exhibit 2: BACR launch came wide to fair value

Source: Bloomberg/TRACE BVAL indications, Amherst Pierpont Securities

Aircastle Ltd’s (AYR: Baa3/BBB-/BBB-) $650 million, 7-year launch at +230 was a highlight early in the week. Bonds are currently indicated 2-3 bp behind launch. The aircraft leasing industry is competitively positioned, as backlogs remain robust and supply/demand dynamics are favorable to the financiers. AYR is a higher-risk issuer than peers AL and AER, but offers attractive compensation given improvements to their overall credit profile in recent years, marked by the achievement of IG ratings in 2018.

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