(Repeats to fix dateline)
By Hillary Flynn
NEW YORK, Dec 2 (IFR) - Both borrowers and investors could
benefit from stronger technicals in the US high-grade market if
forecasts of shrinking primary supply for 2017 prove true.
While primary volumes are on course to hit record levels
this year, some bankers and analysts are predicting a reversal
of that trend in 2017.
Forecasts among some large shops have gross supply next year
ranging between US$1trn and US$1.2trn, potentially putting
volumes at their lowest level since the 2014, when issuance hit
US$1.102trn, according to Thomson Reuters.
Expected repatriation of overseas money, higher rates, a
shrinking M&A pipeline and attractive funding options in the
equity markets mean fewer corporates are likely to tap bond
financing in 2017, analysts argue.
"We're going to be a little down next year by at least 5%,
maybe US$1.2trn issuance overall," a senior banker told IFR.
Year to-date volumes as of Friday stood at US$1.263trn,
putting them within reach of the US$1.269trn seen in 2015 - a
record year for the asset class, according to Thomson Reuters.
With US high-grade corporates facing higher refinancing
needs next year - US$660bn, according to Morgan Stanley - net
supply will be even tighter.
GOOD FOR SPREADS
All this bodes well for stronger technicals, especially in
light of robust demand for the asset class.
Foreign accounts are still keen buyers of the asset class
given looser monetary policy in Japan and Europe, while pension
funds will also be more active as yields rise in the US.
Against that backdrop, JP Morgan sees high-grade bond
spreads tightening from 158bp in November to 140bp by year-end
2017. New issue concessions are also expected to shrink.
"Borrowers will have more flexibility and the bonds will
have more scarcity value, causing new issue concessions to come
down," a credit strategist told IFR.
While NICs increased during the rates sell-off following the
US presidential election in early November, they have been
steadily falling since then.
The average concession dropped to 5.02bp for the week ending
November 18, down from the 6.42bp seen the prior week, according
to Thomson Reuters data.
"Part of what we've seen in the fourth quarter is interest
rate volatility supporting larger new issue concessions," the
credit strategist said. "As that volatility subsides early next
year, concessions will be smaller."
Semiconductor maker Analog Devices'(A3/BBB) US$2.1bn
four-part bond issue on Wednesday underscored this trend,
generating a US$13bn order book and achieving flat to negative
Buyside sources told IFR that they bought Analog's deal
because they expect the primary market will be even more
competitive in January amid lower volumes.
Desks said large M&A deals like Analog's will price
especially tight as the supply of such issuance falls.
Bank estimates for the M&A bond pipeline in 2017 range
between US$135bn and US$180bn, down from US$200bn going into
Supply in the high-grade market could also be impacted by a
rally in the stock market, which has been on a tear ever since
Donald Trump was elected in November.
"Supply could drop more than 5%-10% if the equity market
remains robust and issuers use that to fund transactions," the
credit strategist said. "Stocks are higher every day and if
interest rates rise, that makes equity look more attractive."
Changes in US tax law under a Trump presidency could
encourage companies to repatriate substantial sums of overseas
cash, reducing the need to issue in 2017.
US companies are estimated to have as much as US$2.6trn
overseas, according to the Joint Committee on Taxation.
Issuance reduction as a result of repatriation will be felt
mostly in the tech, healthcare and consumer sectors, with supply
expected to fall by US$75bn, US$36bn and US$10bn, respectively,
according to JP Morgan.
UBS analyst Alex Kramm noted in a recent report that
non-financial high-grade corporate bond issuance declined by 30%
during the last repatriation in 2004.
And even if the passage of tax legislation moves slowly,
companies are likely to hold off until it is clear whether or
not they will have access to overseas cash, JP Morgan said.
"Repatriation would mean lower issuance volume, companies
could just use the cash to fund share buybacks or M&A instead of
issuing debt," a syndicate banker said.
(Reporting by Hillary Flynn; Editing by Paul Kilby and Philip