By Shankar Ramakrishnan
NEW YORK, Dec 16 (IFR) - Bondholders are taking in their
stride renewed noise about the US Federal Reserve tapering its
bond purchases and ensuring a solid issuance momentum in the US
primary bond markets that is expected to carry into 2014.
The first two weeks of December have seen manic debt
issuance activity in the US, with more than US$53bn raised by US
high-grade and high-yield companies.
The gush of supply so late in the year took some in the
market by surprise as it comes after a year in which over
US$1trn of bonds have been issued. It also reflects a perhaps
surprising nonchalance among investors about worries that yields
will spike and cause near-term portfolio losses if and when the
Fed starts tapering its quantitative easing programme.
"You would have thought that there would be some let-up in
the investment interest given it has been a busy year of
issuance and we are at the tail-end of this year, but there is
nothing like that at this point," said one DCM syndicate banker.
The bid for bonds is tenacious - and perhaps
indiscriminate - something reflected in oversized order books
and negative new-issue concessions for transactions across the
whole rating spectrum.
Some vivid examples of such investor frenzy can be found in
the responses to deals done in the past two weeks. Triple A
rated Johnson & Johnson raised US$3.5bn on December 2
from a six-part transaction that tightened a few basis points
through the bookbuilding process - and still ended up with a
US$8.5bn order book. A three-year fixed-rate tranche was priced
with a spread of Treasuries plus 18bp, one of the tightest
high-grade spreads this year.
On the same day, CVS Caremark (Baa1/BBB+), raised
US$4bn from a four-part trade that tightened pricing
substantially from initial price thought levels and ended up
with total books of US$19bn.
Microsoft (rated Triple A) garnered a US$9bn order
book for a US$3.25bn three-tranche deal that tightened by about
5bp to 10bp from IPT levels, and new-issue concessions were
judged to be about flat to 5bp across the tranches.
Debt raised to fund M&A received specific attention. Thermo
Fisher Scientific's US$3.2bn four-part issue tightened
pricing across the tranches by about 20bp to 25bp from IPT
levels and still managed to attract a peak order book of about
US$25bn. This dropped at final pricing to end at an impressive
An acquisition financing bond for healthcare company Endo
Health Solutions (B1/B) almost doubled the size of the
eight-year non-call three senior note deal to US$700m from
US$375m, and still managed to price it at 5.75% versus 5.875%
area price talk.
Despite all the tightness in pricing levels at the primary
stage, almost every deal priced in the last two weeks then
tightened from their new issue levels.
Demand for bonds may have been helped by a perception that
the impact of a tapering is somehow priced in.
"There is greater belief now that taper is priced into the
curve," said Marc Fratepietro, co-head of investment-grade debt
coverage at Deutsche Bank. "The Fed has done a good job so far
in separating the issues of tightening and tapering of
its bond-purchase programme It does seem like the Fed will
continue its accommodative monetary policy stance but tapering
would not lead to tightening, so short rates will be kept low."
Edward Marrinan, co-head of credit strategy at RBS, agreed
with that analysis. "The Treasury market appears to have already
priced in a tapering. The underlying fundamentals of corporates
are still supportive and credit as such looks attractive in
yield and return potential compared with Treasuries," he said.
Most market participants expect this momentum to continue
into the first few weeks of 2014, suggesting next year will be
as busy if not busier than 2013, despite event risks such as
tapering, the US debt ceiling discussions and geo-political
"The strong bid for credit should continue into 2014 because
the real economy is doing well, corporate earnings have been
solid and ratings migration has been stable to positive, with
data showing more corporate upgrades than downgrades. On top of
that, there continue to be healthy flows into credit,
particularly from pension funds," said Fratepietro.
A recent S&P report said the number of entities poised for
upgrades increased to 324 as of November 29 from 249 a month
earlier. This is the highest level since February 2008.