Supply developments

On 11 August, IFR/Refinitiv data showed that US investment grade supply for 2020 had reached USD1.336 trillion, surpassing the full-year record of USD1.33 trillion set in 2017. On 12 August the same source announced that US high-yield issuance had reached USD274.8 billion, exceeding the full-year issuance total for 2019.

The record issuance level for US high-grade debt comes despite a slowdown in issuance in the US corporate market during July. July corporate debt sales were US93.3 billion (versus USD117.7 billion in July 2019). This was well below the USD238.1 billion and USD301.1 of corporate debt sold in the two preceding months, with year-to-date issuance standing at USD1.526 trillion, 78.9% above the USD852 billion sold in the first seven months of 2019.

In addition, equity sales fell to USD18.3 billion in July, versus USD67.5 billion and USD58.1 billion in the two preceding months. The July issuance level was slightly below that for July 2019 (USD18.5 billion), in stark contrast with the two preceding months when sales were roughly double those for the corresponding months in 2019. This activity had been heavily focused on capital increases, which totaled USD99.8 billion between May and June before declining to USD9.5 billion in July.

Early this week, Visa set a new low coupon of 0.75% for a seven-year dollar corporate offering, following Alphabet's record low of 1.10% for 10-year borrowing last week.

High grade debt

There have been several notable transactions this week.

After BP's success last week with a USD2.5 billion 10 and 30-year package, which gained USD9.1 billion in demand, and set a new low in cost for 30-year issuance by the company, Chevron undertook a USD4 billion seven-part offering.

Although the deal did include a 30-year tranche, it was focused primarily on shorter maturities, including two and three floating rate notes alongside two, three, five and seven-year portions. The long-dated portion was offered at a spread of 110 basis points over US Treasuries, versus guidance of 130 basis points and a spread of 150 basis points paid by the firm for seven-year debt in a USD8 billion seven-part sale in May. The use of proceeds will include the repayment of commercial paper, of which Chevron had USD7.5 billion outstanding at end-June 2020, according to its SEC filing. According to Chevron's draft prospectus, outstanding liabilities in this segment have an average life of 156 days and a weighted average cost of 1.67% (reflecting higher borrowing costs earlier this year). By contrast, its new two, three and five-year tranches cost 0.33%, 0.426% and 0.687% respectively.

HSBC has announced the sale of two new issues - for six and eleven years - along with a cash tender for USD13.35 billion of outstanding notes in nine series due in 2022 or 2021. The issue is a liability management exercise to improve the bank's TLAC-eligible debt cushion.

Spain's first auction since the EU relief package was agreed was noteworthy for its strong demand. Spain issued EUR4.53 billion of April 2023, July 2027 and October 2030 debt, for which it attracted EUR10.59 billion in aggregate demand. At all three maturities, the cost of borrowing declined, with the three-year debt clearing at -0.379%, versus -0.223% in Spain's prior auction at the same maturity. The seven-year tranche showed a more dramatic improvement, with EUR1.979 billion sold at -0.001%, versus 0.633% on 7 May.

ESG

Visa Corp raised a USD3.25 billion three-part issue including USD500 million in Green format for seven years, priced at 0.75%, alongside 2031 and 2050 tranches. The deal set a new low coupon for seven-year US corporate debt, marginally undercutting the 0.8% paid by Alphabet the prior week. Alphabet still holds the low for 10 years of 1.1%. Proceeds are for Green projects, including investments in Green buildings, renewable energy, sustainable water and environmentally friendly transportation.

Turkey's Akbank has arranged a USD50 million Green Bond. According to Global Capital, the issue raised a modest USD50 million for four years 100 days, at 6.05%.

Emerging markets

AES Panama placed USD1.38 billion of 10-year debt at 4.375% (380 basis points over US Treasuries). Pricing was tightened sharply from initial guidance of 5% area with the issue reportedly close to four times subscribed. The issue will refinance existing debt within the group in Panama.

Chile's state-owned railway, Empresa de los Ferrocarriles del Estado (EFE) has completed its first international bond sale. On 11 August it placed USD500 million of 30-year bonds at 3.068%, 175 basis points over comparable US treasuries. The company stated that it had attracted interest from over 100 subscribers, highlighting that it had achieved the lowest rate to date for a 30-year Latin American bond sale.

High yield

Aluminum packaging company Ball Corp raised USD1.3 billion of 2.875% 2030 notes. The issue was upsized from USD1 billion with pricing tightened from initial guidance of 3%. Use of proceeds will include repayment of outstanding bank facilities and the repurchase or redemption of its 5% 2022 notes. The deal is described by Refinitiv as setting a record low coupon for junk-rated 10-year debt (howbeit an issue at the highest ratings within the category), being the first sub-3% 10-year dollar junk bond.

According to Ice Data Services, the average US high yield bond now yields 5.36%, having rallied from peak levels of 11% back to rates previously available in March 2020.

Outlook and implications

The new record annual US corporate issuance is impressive, particularly with it having been achieved in under eight months and against the severely adverse economic background generated by the COVID-19 pandemic. However, this trend has been visible for several months: several prior reports have highlighted the sizeable volumes, extended maturities and diverse range of corporate risks successfully absorbed by bond investors.

This reflects the potency of large-scale quantitative easing programs globally, combined with highly expansionary fiscal measures and the expectation that fiscal stimulus may extend longer than in prior cycles, which help to underpin investor credit perceptions regarding weaker and more severely affected companies despite severe economic slowdown.

Within this week's calendar, several positive debt market indicators can be identified:

The use by Chevron of shorter dated debt - with six of its seven tranches being for seven years and below - as a way to extend duration relative to commercial paper, while benefitting from the decline in interest rates to avoid cost increases through the refinancing, at least on shorter-dated tranches. This is risk positive by reducing the firm's rollover refinancing risks, leaving it less exposed to future volatility in market conditions.

HSBC's large-scale repurchase programme and new issue highlight its progress in improving its MREL/TLAC cushions of debt eligible for bail-in during hypothetical financial stress, increasing the security of depositors and reducing potential risk of needing state support. Similar exercises elsewhere in the sector would represent important progress in balance sheet management to meet this facet of the Basel III package, the last major component of the original Basel III reforms still incomplete within the sector.

Both Visa and Alphabet have set new coupon lows for high-grade corporate debt, at seven and 10-year maturities respectively. Visa's success is likely to have been further boosted by its use of Green Bond format, enabling it to capture incremental demand from dedicated ESG funds and sub-portfolios.

Ball Corporation's 10-year bond also set a record low, this time for sub-investment grade debt at this maturity. Its success ties in with the dramatic risk-on recovery in junk bond yields. These have more than halved since their April peak despite only limited recovery - and severe ongoing risks - in the real economy.

EFE's 3.068% coupon for a 30-year Latin American bond, another record low.

Spain's strong auction demand and lower funding costs represent a further indicator, along with the strong recent performance of Italian government bonds, of the positive impact of the EU's EUR750 billion recovery programme combined with the ongoing impacts of ECB monetary easing. For both countries, the positive market response to issuance highlights the effectiveness of policy intervention to mitigate the underlying deterioration in both countries' debt fundamentals, notable their debt stock-to-GDP ratios.

Posted 14 August 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence