Safeway to Lead Bond Flurry Topping $100 Billion: Credit Markets

The bond market is about to roar back to life after the slowest August in six years.

From grocer Safeway Inc. to Australian mall owner Westfield Corp., companies are poised to fuel debt sales in the U.S. next month that Bank of America Corp. said may exceed $100 billion, keeping the market on pace for a third straight record year.

“People are preparing to walk in on Sept. 2 with a pretty robust tone,” said Huw Richards, the New York-based co-head of investment grade finance at JPMorgan Chase & Co., the biggest underwriter of corporate bonds.

Behind the anticipated rush to raise debt is the biggest acquisition boom since the credit crisis, as well as the opportunity to lock in near-record low yields while the rally that began in 2009 endures. Bonds have returned 1.3 percent this month through Aug. 26, more than recouping July’s 0.38 percent loss, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.

While August is typically slow as investors and bankers take vacations, this month was particularly dead. Sales in the U.S. of about $56.3 billion are down from $91.3 billion in July and mark the least amount raised in an August since 2008, according to data compiled by Bloomberg.

For the year, issuance totals $1.07 trillion, within reach of the $1.57 trillion record set in 2013.

Yield Decline

The average yield on debt from the most creditworthy to the riskiest borrowers worldwide fell to 3.2 percent yesterday after rising to 3.35 percent on Aug. 1, according to the Bank of America Merrill Lynch Global Corporate & High Yield Index. The measure reached an all-time low of 3.09 percent in May of last year.

In Europe, it’s the quietest August on record, with 18 billion euros ($23.8 billion) of deals, compared with 44 billion euros last year, Bloomberg data show. Investment-grade rated borrowers in the region, excluding financial firms, may raise as much as 30 billion euros next month, according to Societe Generale SA.

“In September, investors will have a lot of cash to put to play and they’ll forget about uncertainties like geopolitical risk and resume buying,” Demetrio Salorio, the London-based global head of debt capital markets at Societe Generale’s corporate and investment banking unit, said in a telephone interview. “Although the world seems to be a more difficult place to read than a few months ago, there are no major changes in the way investors will deploy their savings.”

Investment Grade

Average yields on investment-grade bonds in Europe have fallen 0.17 percentage point this month to a record 1.3 percent, Bank of America Merrill Lynch data show. The securities have returned 1.1 percent in August, the most since January.

Issuance is already under way in Europe this week with a 3 billion-euro deal from UBS AG, Switzerland’s biggest lender, and a 1.75 billion-euro sale from Bayerische Motoren Werke AG, the world’s biggest manufacturer of luxury autos.

UniCredit SpA and Banco Santander SA, the biggest lenders in Italy and Spain, are planning to issue contingent capital bonds as the riskiest bank debt recovers from a sell off. Both lenders will start meeting European investors on Sept. 1 to market additional Tier 1 notes. Societe Generale was the last major European bank to issue the securities, selling $1.5 billion of notes on June 19, Bloomberg data show.

Issuance Flood

“If we see a flood of issuance and it’s not managed correctly, spreads could widen as a result and that could slow down opportunistic supply,” said James Tayler, a corporate bond syndicate banker at Royal Bank of Scotland Group Plc in London. “We need to keep a steady run rate through the last week of August into September; the market is still somewhat price sensitive and vulnerable to supply indigestion.”

Issuance may also be curbed should there be an increase in geopolitical tension, which prompted investors to withdraw a record $7.1 billion from U.S. junk bond funds earlier this month.

“The number of market windows will diminish if there’s increased volatility linked to the situations in Ukraine or the Middle East,” Societe Generale’s Salorio said.

Bond sales will be driven in part by an increase in mergers, JPMorgan’s Richards said. A total of $2 trillion of mergers and acquisitions has been announced globally this year, up 66 percent from the same point in 2013, Bloomberg data show.

Buyout Finance

Cerberus Capital Management LP’s Albertsons is poised to raise $1.63 billion in bonds to finance its buyout of Safeway, according to regulatory filings. Westfield, which owns 38 shopping malls in the U.S., may raise about $2 billion to replace part of a bridge loan associated with a restructuring.

Dynegy Inc. will seek as much as $5 billion in senior notes to help finance the purchase of power plants from Duke Energy Corp. and private-equity firm Energy Capital Partners, the Houston-based company said in a statement Aug. 22.

British Sky Broadcasting Group Plc is marketing bonds to refinance loans raised to help fund its acquisition of Sky Italia and majority stake in Sky Deutschland. The company is holding investor meetings in the U.K., Europe and the U.S. starting Sept. 2.

“You will probably see new issuance north of $110 billion and up to $130 billion in September,” Ashish Shah, the New York-based global head of credit strategies at AllianceBernstein Holding LP, said in a telephone interview. The firm manages about $250 billion in fixed-income assets.

Rate Speculation

Speculation the Federal Reserve will raise benchmark interest rates next year after keeping them near zero since December 2008 and the potential for increased volatility in markets may create “more urgency” among companies to “opportunistically lock in rates” now, Jim Bonetti, the head of U.S. leveraged finance syndicate at Morgan Stanley in New York, said in a telephone interview.

Fed officials raised the possibility they might boost rates sooner than investors expect as they neared an agreement on an exit strategy from their extraordinary stimulus measures, according to minutes of their July meeting. Investors are pricing in a 43.2 percent chance that rates will rise to at least 0.25 percent by March 2015, based on Fed Funds futures.

That means companies still have a “free pass” for some time to raise longer-term debt at low rates, said Scott Kimball, a fixed-income manager at Miami-based Taplin Canida & Habacht LLC, a BMO Financial Group unit that oversees $8 billion.


He expects European banks and health care, technology and automotive companies in the U.S. to raise bonds in coming months. “Our position has been that investment grade looks reasonable,” he said.

Investment-grade bonds in the U.S. have gained 7.2 percent this year, compared with 5.8 percent for high-yield, high-risk debt, according to Bank of America Merrill Lynch index data.

The tighter yield environment “speaks to the resilience of the investment grade market,” Todd Mahoney, the New York-based head of fixed income syndicate for the Americas at UBS, said in a telephone interview. “We have been surprised with the strength of the investment-grade market, particularly in the backdrop of all the volatility.”

(A previous version of this story corrected the location of Todd Mahoney in the last paragraph.)

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