Fringe-rated credits in demand

Fri Feb 28, 2014 3:42pm EST

NEW YORK, Feb 28 (IFR) - The blatant hunger among investors for yield and diversification is creating pristine issuance conditions for fringe investment-grade rated companies, some of which are only just out of bankruptcy, helping them plant their flag in the US debt markets.

This week, the US high-grade market was flooded with paper from a host of Triple B rated companies that took advantage of calls for paper that offered some pick-up in yield compared with the usual batch of issuers with much higher ratings.

In a week when 23 high-grade issuers raised more than US$29bn, 14 of them were companies that carried ratings in the Triple B band. Though these companies raised just US$9bn of the total, the results they achieved have taken the market by surprise.

The responses to their deals simply showed that although investors continued to be mindful of duration and credit risks, they were easily convinced to accept pricing levels that were closer or even below "fair value".

"These are possibly some of the best issuance conditions ever for corporates in the US high-grade market," said a banker. "Lots of money is flowing into high-grade funds and pension funds are hungry for paper with duration, which means that at the moment the investor base is crazy buying everything."

Money flowing into high-grade funds so far this year has been relentless. For the week ending February 26, Lipper reported an inflow of US$2.39bn into corporate investment-grade funds, taking the year to-date tally to US$18.48bn. The inflow during the week was the sixth-largest of all time.

What has also pleasantly surprised issuers has been the speed at which the investor mood had turned from being ultra price-sensitive in mid-January, when the market was occupied with concerns over emerging market economies, to being very accepting of substantial spread tightening during the bookbuilding process.

"The deals done this week were by fundamentally sound credits, but investors are also showing more flexibility than usual in terms of valuations because almost all these trades were priced with negative new issue concessions," said one senior banker.

"These are possibly some of the best issuance conditions ever for corporates in the US high-grade market"

This week, for example, there were numerous deals pricing about 15bp-20bp tighter than initial price thought levels, and still order books in most instances were about four to five times the size of the deal.

Frenzy exemplified

The response to two trades by Delphi Automotive and LyondellBasell exemplified the frenzied buying mood, when they raised a total US$1.7bn by issuing 10-year and 30-year bond offerings after receiving US$7.4bn in orders.

Though both these companies are now considered fundamentally strong after successfully coming out of bankruptcy about four years ago, the enthusiasm for their trades seemed unbridled.

Delphi Corp, rated Baa3/BBB-/BBB-, was able to increase the size of its 10-year debut investment-grade trade from US$500m to US$700m, which was priced some 30bp tighter than the initial price thoughts.

Delphi's investment-grade status is recent. In December, it was pushed there by S&P, which joined Fitch at BBB-. In February, Moody's upgraded the name to Baa3.

The trade, which will fund a repayment of its 2019 notes, started off with IPTs of Treasuries plus 175bp area that were tightened to 150bp area at guidance. These moved in another 5bp at final pricing.

Delphi's books touched a peak of US$5bn but came off slightly to end at US$3.75bn - understandable, given that the bonds were judged to have priced tighter than peers. Against the outstanding bonds of similarly rated Textron, the Delphi paper was judged to have priced with negative new issue concessions.

A similar response greeted LYB International Finance, a unit of LyondellBasell Industries, which emerged from bankruptcy in April 2010.

The company's 30-year bonds were announced with IPTs of plus 140bp-145bp, which moved in about 15bp at final pricing on a total deal size of US$1bn. The final order book was about US$3.65bn on new bonds that were judged to carry just 3bp-5bp of concessions over the outstanding July 2043s that were quoted at plus 125bp on the day of the deal.

Triple B rated names such as Williams Partners, GATX Corp, Kinross Gold and Juniper Networks featured among the issuers last week and all got similar over-the-top results (see "Big names and Triple Bs rock high-grade market").

"Investors have been keen to get their hands on a new name with a growth story that gave them diversification and better yield for a while now. These trades simply check those boxes. That said, the demand for primary paper is also a result of the lack of depth in the secondary market, where investors would struggle to get even US$5m of these bonds, but that has been a problem for years," said a syndicate official.

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