HG monthly: Issuance races ahead of 2020 pace on jumbo-deal influx

After a relatively mild January, a slate of big-ticket pricings in the first week of February drove high-grade issuance volume ahead of last year's pace, as issuers continue to lock in rates against a steepening yield curve. New issuance in the U.S. primary market — when excluding sovereign, supranational, agency and hybrid debt/equity structures from the count — is $168.5 billion through Feb. 5, 2021, versus $148.5 billion over the comparable 2020 period, according to LCD.

Alibaba on Feb. 4 completed a $5 billion offering in four parts, following jumbo prints earlier in the week from Apple Inc. ($14 billion), Boeing Co. ($9.825 billion), Altria Group Inc. ($5.5 billion), and UBS Group AG ($4 billion), propelling weekly issuance to more than $45 billion, or well above syndicate projections for $20 billion to $40 billion. The per-transaction average across all high-grade deals printed for the first week of February was roughly $3.5 billion, versus a January average of $1.7 billion.

After record-smashing issuance in 2020, January's issuance total, at $123 billion, lagged the year-earlier pace by roughly $5 billion, reflecting a dip in financial-sector volume and a flat comparison to issuance from non-financial borrowers.

Notably, though, the 1.71% average yield at issuance for January's high-grade offerings marked a new pandemic-era low, down from averages near 1.80% in November and December. The January average was more than a quarter point below the 1.97% average for August 2020, when gilt-edged issuers swarmed the marketplace to lock in what were then the lowest-ever rates across the yield curve, according to LCD.

That lower yield average in January this year in part reflected a higher incidence of shorter-dated prints relative to the August experience, which blunted the impact of higher long-term Treasury yields this year. In January, more than 26% of the new-issue tranches priced on the primary market carried maturities of less than five years, versus only about 11% in August 2020, LCD data show.

The lure of low rates drew PACCAR Financial Corp. back to the marketplace at the end of January to issue its second three-year notes offering since early August, both of which sported 0.35% coupons, or the lowest ever recorded for that maturity tenor. Also netting the same coupon were Bank of New York Mellon Corp. late November last year, and National Rural Utilities Co-op Finance Corp. this week. The latter issue came at the lowest reoffer yield across that quartet of 0.35% prints. Meantime, the reoffer yield for Cargill Inc.'s 0.40% three-year issue, priced on Jan. 28, at the time ranked among the 10 lowest ever recorded, according to LCD.

While the high-profile issuers with jumbo offerings this week didn't set new any low-cost records, they nevertheless enjoyed compelling pricing execution to manage forward debt maturities. Apple, which has $7.75 billion of debt rolling off this year alone, netted funding costs sandwiched between the rates it garnered in August 2020 and in May 2020, both of which at the time of pricing represented Apple's lowest-to-date rates. Boeing — which saw the yield for a 5.15% 10-year issue it priced last April ebb to 2.7% as of this week — returned with a $9.825 billion offering of senior callable notes, as it looked to pay down the emergency draws it incurred under a $13.8 billion, two-year delayed-draw term loan it netted in the early days of the pandemic crisis last year. Altria's print backed the repayment of 2022 debt maturities, as well as longer-dated issues via a debt tender offer.

Apple's offering was the company's second-largest offering to date — it priced a $17 billion placement in April 2013 — and the largest on the U.S. corporate marketplace since Boeing Co. printed $25 billion of notes on April 30, 2020. The company had stepped back from the bond marketplace for the better part of two years, after the tax reforms implemented at the end of 2017 allowed it to lean on cash funding for shareholder returns, with an ultimate goal of leveling its cash and debt balances over time. But it has been active in the pandemic era as it capitalized on historically low borrowing costs.

Syndicate desks at the end of this week's surprisingly strong issuance run were wrestling with whether to increase their February issuance projections, given the coupon-boosting impact of a steepening yield curve for prospective issuers as they come out of earnings blackouts. For investors, too, the steepening curve poses immediate risks to new-issue bond performance, even as most issues break syndicate to tighter trading levels in the secondary market.

Through Feb. 3, the 2021-to-date return for the S&P U.S. Investment Grade Corporate Bond Index was negative 1.4%, as the yield differential between 2- and 30-year Treasurys had swelled 30 basis points in 2021, to 182 bps on Feb. 4, versus 109 bps at the start of August 2020.

However, soft performance still does not reflect a dramatic shift in risk perceptions, as the latest T+93 spread for the index on Wednesday remained comfortably through the T+99 average over the trailing three months, and was just off the pandemic-era low at T+90, established in January. Alibaba, under scrutiny for potential regulatory risks as it eyes global expansion, reportedly drew orders this week six times the offering amount ahead of the formal launch.

S&P Global Ratings, in a report published at the end of January titled "Global Financing Conditions: Bond Issuance Could Decline 3% To $8 Trillion In 2021," noted that the morphing yield curve and mounting inflation risks may only serve to stoke the near-term urgency to lock in rates, particularly among issuers with M&A ambitions. After a fallow year for M&A-driven bond issuance in 2020, as issuers focused on liquidity and liability management, “the early part of the year may see a glut of acquisition-based activity while financing conditions are still optimal,” Ratings stated in the report.