NEW YORK, Dec 9 (IFR) - US investment-grade bond issuance
volumes reached US$1.284trn this week, breaking annual issuance
records for the sixth year running, according to IFR data.
The previous record set in 2015 saw US$1.269trn of deals
Financial sector issuers have dominated issuance by sector
in 2016, selling 247 out of the total 801 deals to-date, as
banks have sought to print new bonds to meet incoming Total Loss
Absorbing Capacity (TLAC) rules and replace maturing debt.
But M&A has also been a big driver and resulted in some of
the biggest deals of the year. Anheuser-Busch InBev's US$46bn
issuance, for example, to finance its purchase of SABMiller, is
the biggest deal issued in 2016.
Borrowers piled into the debt markets in 2016, taking
advantage of low interest rates and seemingly inexhaustible
investor demand to also finance stock buybacks and to refinance
old debt at historically low costs.
"We entered the year with lots of debt that needed
refinancing, and we got a boost from M&A financing with large
deals like AB InBev, Dell and Abbott Laboratories," said Leo
Civitillo, global co-head of fixed income capital markets at
Issuance has now risen every year since 2011, when the total
was US$741bn, according to IFR data.
But with the Federal Reserve widely expected to begin
raising rates at next week's FOMC meeting and a smaller M&A
pipeline going into 2017, most market participants expect that
record run to end.
Wells Fargo analysts project gross issuance of US$1.2trn
next year, a modest decline on 2016's figures. Bank of America
Merrill Lynch analysts forecast a bigger drop, to about
"I don't think we're going to hit a new record next year,"
said Michael Collins, senior investment officer at Prudential
Financial. "Rates are going higher, and the most aggressive M&A
deals are probably behind us. It's going to be hard to repeat
the level of activity we have seen."
Civitillo at Morgan Stanley counted around US$75bn less M&A
financing in the visible pipeline compared with the same point
"However, general business sentiment is strong, and we can
see the M&A wave is not going to end here," he said. "We are
just entering 2017 with a much less robust pipeline than 2016."
BAML forecasts US$90bn of investment-grade M&A bond supply
in 2017 - less than half the roughly US$241bn in 2016.
Some large M&A deals are under intense scrutiny, such as the
merger between AT&T and Time Warner. Abbott Laboratories,
meanwhile, is trying to terminate its acquisition of Alere.
Bank issuance is tipped to remain strong, with financial
borrowers still tapping the market into year-end.
US banks including Goldman Sachs, PNC Bank and Citigroup hit
the market with opportunistic deals this week, and the Yankee
market has also been active. French lender BNP Paribas sold a
US$750m Additional Tier 1 trade, the first such capital deal
from a Yankee borrower since September.
Yet more could come before the year is out. Credit Agricole
held calls with investors on Friday for a senior non-preferred
TLAC deal - the first of its kind - and that could hit the
market next week in either US dollars, euros, or both.
Still, US banks are on a strong footing, and many have
stormed the market with callable structures in the past few
months to help meet TLAC needs.
"The money center banks seem to have some more comfort
around how much TLAC debt they need to issue," said a DCM
banker. "It feels like they are ahead of their plans."
Wells Fargo analysts estimated US$537bn of supply from
financials in 2017.
Bankers are also factoring in the potential impact on
issuance from the new US administration. President-elect Donald
Trump will take power on January 20, and if he grants companies
a tax holiday when repatriating overseas earnings, that could
also keep a lid on bond volumes.
"By issuing in dollars, those companies have been able to
give the proceeds of foreign profits out to equity investors in
the US through buybacks," said Jason Shoup, fixed income
strategist at Legal & General Investment Management America.
"But if they can repatriate that cash cheaply, their
issuance needs decline because they don't need to raise that
money through the bond markets."
Repatriation through a one-off tax holiday is very likely
given that both the Senate and the House have a Republican party
majority, BAML analysts said.
Lower issuance in 2017 is expected to lead to tighter
corporate bond spreads, as investors compete for increasingly
Average high-grade bond spreads were at 133bp as of
Thursday's close, 40bp tighter than at the start of the year,
according to Bank of America Merrill Lynch data.
Hans Mikkelsen, head of US high-grade strategy at BAML,
predicts a further 20bp tightening in 2017, which should help
offset the impact on borrowing costs from rising rates.
(Reporting by Will Caiger-Smith; Additional reporting by John
Balassi, Mike Gambale, Anthony Rodriguez and Hillary Flynn;
Editing by Jack Doran, Shankar Ramakrishnan and Natalie