by Danielle Robinson
NEW YORK, May 9 (IFR) - The US dollar-denominated investment grade debt market is on track for its biggest year since the credit crisis, as syndicate desks in the US prepare for $85bn-$100bn of deals in May.
With $20bn-$25bn in the calendar this week, the amount of unsecured corporate debt raised year-to-date is likely to be around $360bn or more by Friday -- exceeding the $338bn raised in the entire first half of 2010. That’s a figure that excludes self-led deals, everything 18-months and shorter, all structured bonds and anything issued by sovereigns, supra-nationals and agencies.
The market’s extraordinary strength puts it well on the way to beating last year’s $768.4bn total, making it the biggest year since 2007’s all-time record of $1trn, according to Thomson Reuters data.
“I don’t think we’ll keep up this pace throughout the year, but we are definitely on the way to exceeding 2010 issuance levels,” said Anne Daley, a managing director in Barclays Capital’s investment grade syndicate group.
Bankers are considering whether to revise their 2011 forecasts up from around the $700bn area for 2011 to around $800bn. That compares with $646.8bn, $718.5bn and $768.4bn in 2008, 2009 and 2010, according to Thomson Reuters data.
Volumes were in the $400bn to high $600bn area in the early 2000s, before ballooning to all-time records of $940bn in 2006 and $1trn in 2007.
The volume of issuance fell back in 2008 and has risen steadily since as banks regained access to unsecured debt, rates dropped and as corporates diversified beyond local markets and bank loans.
FUNDING A WAVE OF MERGERS
This year’s volumes have been further boosted by the resurgence of new themes such as share repurchasing and mergers and acquisitions (M&A).
“In 2009 and 2010 the vast majority of corporates were loathe to use liquidity to repurchase stock, just given the uncertain times,” said the head of North American debt capital markets (DCM) at a major bank in New York.
“Now, particularly given the large cash positions these organizations have accumulated, having a stock repurchasing program makes sense to sop up excess liquidity. Corporates finance it with commercial paper and then pay that down with bond issuance.”
Debt issuance related to M&A activity picked up significantly in the first quarter and should continue to grow for the rest of the year.
“M&A-driven bond issuance was 25-30% of the market place pre-crisis,” said Bryan Jennings, managing director in global capital markets at Morgan Stanley. “It died back to as close to zero as you can get during the crisis, but now it’s driving as much as 10%-15% of total investment grade volume and I would be shocked if it did not account for 20-25% by the end of the year.”
Certain corporate sectors have also become more active this year. Industrials exposed to rising commodity prices, for instance, are tapping the market for more working capital. Some of the more infrequent borrowers in the technology, media and telecom (TMT) sectors are also borrowing again.
“We have seen tech issuers return, whether it’s Oracle ORCL.O, Microsoft (MSFT.O) or first time issuers like eBay (EBAY.O), looking to come into the market as their businesses mature and as they begin to embark on more aggressive policies to return capital to shareholders,” said the DCM head.
The low rate environment, however, continues to be the foundation upon which US and non-US so-called ‘Yankee’ issuers have based funding decisions.
“The rate market continues to drive people to fund early,” said Andrew Karp, managing director and head of investment grade debt syndicate for the Americas at Bank of America Merrill Lynch.
“We continue to see a steady amount of pre-funding by issuers being persistent about managing their liquidity and not waiting until they get within three to six months of maturities.”
Yankee deal volume gathered force last year and has continued to increase year-to-date, especially in the FIG space, where foreign banks now account for more than half of all US dollar FIG deal volume.
“We’ve seen about 50% of all volume in investment grade come from non-US borrowers,” said Paul Spivak, managing director and head of investment grade debt syndicate for the Americas at Morgan Stanley. “We’ve seen this increase from Yankees for a while, but it’s gotten even higher this year.”
Anecdotally, bankers feel that the number of first-ever borrowers has also increased this year.
“We have seen first-time issuers -- as well as those that are rare issuers in US dollars -- materially change and enhance the methods by which they access the international capital markets,” said the DCM head.
“There has definitely been a significant broadening and expansion of markets that borrowers are looking to access. That’s naturally benefited the US dollar market because it’s so liquid, it’s very diversified in terms of investor type and it’s reliable.”
(Danielle Robinson is a senior IFR analyst; Tel: 1 646 223 6141)