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US IG breaks records for sixth year
December 9, 2016 / 8:24 PM / a year ago

US IG breaks records for sixth year

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 issued.

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 Morgan Stanley.

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 US$1.062trn.

“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 last year.

“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 scarce assets.

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 Harrison)

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