The Long and Short

Getting ahead of industrial investment grade supply

Meredith Contente | 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. This material does not constitute research.

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

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 © 2024 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.