Credit market rout may force US IG issuers to do more legwork
NEW YORK, June 21 (IFR) - The rout in credit markets this week sparked by a sharp spike in interest rates may force US high-grade corporate bond issuers to temporarily change the way they bring deals.
Instead of their usual practice of straight book-building followed by launch, issuers worried about getting deals done in the current conditions may introduce the kind of pre-marketing process that is used by certain Yankee and emerging market borrowers during periods of volatility.
"The ongoing market volatility could force, albeit temporarily, issuers and bookrunners to engage the market more than before to de-risk deal execution outcomes," said a senior banker.
"There is a possibility that issuers may choose to look at doing an investor marketing exercise, to effectively kick tires prior to execution - as opposed to just driving by with a transaction that has a wide variance of potential outcomes."
Financial markets sold off heavily following a sharp jump in Treasury yields after the Federal Reserve signaled it may start to 'taper' its asset purchase program later this year.
The credit markets had been reeling for a few weeks amid speculation about the timing of such a move. But Fed Chairman Ben Bernanke's comments on Wednesday that the Fed expects to slow the pace of bond purchases this year and completely end it by mid-2014 brought fresh anxiety.
High-grade issuance, which seemed to be revving up early in the week, ground to a standstill. Companies raised US$12.85bn in the two days before the FOMC, including a jumbo from oil giant Chevron. And though the deals came with higher new issue concessions, deal execution was not an issue.
But since Wednesday, the benchmark 10-year yield has risen more than 32 basis points, posing fresh questions about clearing levels and investor appetite for transactions.
"We are back to a period of 'uncertainty' in regards to what it takes to clear trades," said a syndicate banker. "A new landing strip has to now be developed in terms of the right implied premiums to start trades, and how much pricing leverage (if any) to finish."
Some said the uncertainty was such that even if companies stick with their recent practice of announcing deals with initial price thoughts that included big new issue concessions - the premium paid over outstanding bonds or the bonds of peers - there was no guarantee of deal execution.
"The starting concessions which we have seen recently have been as much as 40bp but now it may have to go up another 20-30bp," said one syndicate banker.
The recent slowdown in flows into investment-grade funds is another factor. That could diminish interest from one group of investors, forcing companies to depend solely on a narrower section of buyers who are likely to be more price-sensitive and choosy about the deals they want to support.
High-grade funds are still seeing net inflows but the pace has braked sharply. Lipper reported a net inflow of US$169.7m in June so far, far lower than the US$9.4bn recorded in May.
"The normal approach of bookbuilding with no little or no pre-marketing is still considered best practice but if conditions deteriorate sufficiently it could become necessary to engage investors at an earlier stage on certain deals" said Marc Fratepietro, MD and co-head of corporate coverage at Deutsche Bank.
The move may not happen immediately. And the change may not be necessary as the backlog of issuers is not large and the pipeline comprises small-sized deals.
"This is manageable and normal at this time of the year," said a banker.
In any case, the pace of investment-grade bond issuance is expected to decline over the rest of the year and could be as much as US$200bn lower in the second half than the US$498bn issued so far in 2013, according to Barclays.
"We will not keep this run rate up," said Justin D'Ercole, head of Americas investment-grade syndicate at Barclays, and especially not when the Federal Reserve is tapering its QE.
New issuance in the investment-grade corporate bond market in recent years has ranged from US$850bn to US$950bn a year.
That could fall to as low as US$700bn, said D'Ercole, depending on how the market reacts to higher rates.
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