The Long and Short

Getting ahead of industrial investment grade supply

| January 19, 2024

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.

Investment grade corporate supply so far this year has exceeded expectations. And while banks and financials have dominated issuance, industrial credits should start coming to market soon as earnings are released. Given that on-the-run bonds remain the preferred holding for investors focused on liquidity, it is important to look at credits with upcoming maturities to identify potential issuers. Some credits have already taken advantage of the strong new issue demand to refinance paper, while others are looking to reduce debt following an acquisition. However, there remains a handful of credits that will likely tap the primary market soon to refinance maturities.

Dealers had estimated $30 billion to $35 billion of issuance for the week after the Martin Luther King holiday, but by Thursday issuance had surpassed $49 billion. At time of writing, new issue supply stood at $149.3 billion month-to-date, which compares to the $144 billion of investment grade issuance for January 2023 (Exhibit 1). It is important to note that the three largest months for investment grade supply in 2023 were January, February ($155.5 billion) and May ($152.2 billion). Issuance tends to slow in summer months, hence the higher volume in May. If the current pace of issuance continues for the rest of January, supply for the month will likely be greater than any month witnessed in 2023. Furthermore, issuance for January 2024 could set a record. The greatest volume on record for the month of January was back in 2017 when $176 billion was issued.

Exhibit 1: January investment grade volume (2014-2023)

Source: Bloomberg Data; Santander US Capital Markets

A number of credits have upcoming debt maturities in the first quarter (Exhibit 2). Some of the credits, like UNH, have more debt maturing throughout the year which increases the likelihood of them tapping the primary market. Others, like DIS, will be funding acquisitions in addition to refinancing maturing debt, which also increases the likelihood of issuance. IBM could choose to use their strong cash balance to repay debt, but the company has remained an active issuer in the debt market over the past two years. Lastly, BA built a up a large debt burden when the 737 Max was grounded. While deliveries are commencing and could provide cash flow to start chipping away at its debt load, recent negative headlines could put debt reduction efforts on hold.

Exhibit 2. Industrial new issue candidates

Source: Bloomberg; Santander US Capital Markets

Some credits have taken advantage of strong new issue demand to refinance their debt ahead of the maturities (Exhibit 3). The majority of the names have all issued in 2024, with a handful of names issuing in the latter part of last year. Utility and energy credits tend to be active issuers as debt comes due given their large capital expenditure programs coupled with relatively low cash balances. Increased interest costs could put pressure on holding companies, relative to operating companies in the utility and energy space as holding companies cannot recoup the increased interest costs with rate hikes. That said, we could see further divergence in spreads between parent and operating company debt.

Exhibit 3: Industrial credits that have already refinanced

Source: Bloomberg; Santander US Capital Markets

Other credits are looking to reduce overall debt levels and bring leverage closer to targets, hence they are likely to not be active issuers until leverage metrics are met (Exhibit 4). T continues to target a net leverage metric of 2.5x and reduced net debt by $3.0 billion in fiscal third quarter. Management noted that they are on track to hit their leverage target by the first half of 2025. COP is targeting gross debt of $15 billion, which means that company would need to repay roughly $4.0 billion of debt to hit management’s target. PFE recently closed on its acquisition of Seagen Inc. which increased leverage above 4.0x. PFE will need to reduce leverage below 3.0x in order to maintain its current ratings. Lastly, WBD continues to reduce debt following its acquisition of Discovery. WBD is targeting gross leverage in the 2.5x-3.0x range, more than a full turn below current leverage.

Exhibit 4: Industrial credits looking to delever

Source: Bloomberg; Santander US Capital Markets

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

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