Uncategorized

Burst of new issuance creates opportunity as rally stalls

admin | 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.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.