Get Ready for a Big Wave of U.S. Corporate Bond Sales in May

  • Estimates for issuance among three dealers top $100 billion
  • Total issuance for 2016 may come close to last year's record

Wall Street’s biggest underwriters are gearing up for a deluge of U.S. corporate bond sales in May, after a relatively dry April.

Money managers have cash to put to work in the U.S., as negative yields in Europe and Japan drive investors overseas in search of higher returns. Corporate investment-grade funds saw inflows of $1.36 billion last week, the seventh straight week of deposits, according to Lipper US Fund Flows data. And there’s a growing number of companies from Apple Inc. to Dell Inc. that are likely to tap the market this year to fund share buybacks or acquisitions.

Barclays Plc is estimating companies will sell around $150 billion of bonds in May, compared with $88.6 billion in April as of late Thursday. Citigroup Inc. sees about $110 billion, and Mizuho Securities Co. expects more than $100 billion.

"I think we could see a significant uptick" in May issuance, said Justin D’Ercole, global co-head of investment-grade syndicate at Barclays in New York. "Recent weeks have been relatively quiet and there’s strong investor demand for new issuance.”

The healthy outlook for the second quarter means that 2016 may come close to matching last year’s record-breaking $1.3 trillion of debt deals, syndicate bankers said. It may also mean that companies have to pay a little more to borrow as they compete for investors’ dollars, but their overall financing costs will likely still be low, said Vincent Murray, the head of U.S. fixed-income syndicate at Mizuho in New York. 

“We’re seeing our calendars building for the whole month of May,” Murray said. "Investors really have a lot of cash to spend.”

Junk Heats Up

More than $467 billion of investment-grade debt has been sold this year, the second highest year-to-date figure going back to at least 2005, according Bloomberg data. Last year was the highest, as companies clamored to sell before the U.S. Federal Reserve started hiking rates.

Even for junk-rated companies, issuance is showing signs of heating up, after a deep freeze at the start of the year. More than $33 billion of speculative-grade notes have been sold this month, up from about $21 billion in March, Bloomberg data show.

Though the junk market remains open mostly to higher-quality issuers, investors may start to see riskier types of financings, such as deals backing dividend payouts, according to Matthew Bloom, head of corporate credit research at Guggenheim Partners.

“It feels like we’re starting to hear and see a lot of rumblings of more activity in the primary market,” Bloom said.

Ready for the Fed

Investors are more sanguine about the Fed raising rates now, said Barclays’ D’Ercole. The U.S. central bank on Wednesday left the door open for a rate hike in June, but reiterated that it would probably raise rates gradually.

The average yield on investment-grade bonds has been declining from a more than three-year high of 3.7 percent in December to 3.09 percent, according to Bank of America Merrill Lynch index data. That’s below the 10-year average of 4.4 percent.

This week, the pipeline of companies that are planning to borrow has grown.

Abbott Laboratories needs funding to back its $25 billion takeover of St. Jude Medical and has obtained a commitment for as much as $17.2 billion of bridge financing for its purchase of Alere Inc. Apple Inc. said that it will continue to tap the debt markets to help fund share buybacks and higher dividends.  

“This is a market that’s rewarding borrowers that come with large M&A-related financings,” said Peter Aherne, head of North America capital markets, syndicate and new products at Citigroup. He said those deals, many of which have topped $5 billion in size, have been the ones he’s seen perform the best.

Even if issuance picks up, it will be hard to break last year’s record, said Andrew Karp, co-head of Americas investment-grade capital markets at Bank of America Merrill Lynch.

"The market got used to not just a high volume of activity, but also an increasing volume of activity. I don’t think we’ll get that this year. I think we’ll end up in or around where we ended up last year."

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