Record Run for Company-Bond Sales Seen Coming to a 2017 HaltBy
Drop of 10%-20% for investment-grade forecast as M&A slows
‘Very different environment’ as rates rise, Trump era begins
Breaking habits can be hard, especially when they involve making money.
That’s the prospect for bond investors in the coming year. After six straight years of growing U.S. investment-grade corporate-debt sales, bankers and investors are pegging 2017 as the year the frenzy finally fades. The new year has several hurdles in place already.
For one, interest rates have risen to two-year highs, making borrowing more costly. And the pipeline for new-acquisition financing is smaller than 2016’s, which saw such mega-deals as Anheuser-Busch InBev NV’s $46 billion sale to fund its SABMiller Plc takeover, and Dell Inc.’s $20 billion offering to support its EMC Corp. bid. Uncertainty around potential tax reform and trade wars in a Trump administration may also sideline more issuers.
“That all points to supply being down, year over year,” said Dan Mead, head of the U.S. investment-grade syndicate desk at Bank of America Corp.
A 10 percent to 20 percent drop in new bond sales next year, as some strategists have predicted, would still leave gross volumes above $1 trillion, as they’ve been since 2012. Investment-grade companies sold $1.35 trillion of bonds in 2016, a 2 percent increase from the 2015 record. Blue-chip companies worldwide sold more than $2.1 trillion of debt this year, a slight decrease from 2015 levels.
After banks, health care companies were the most prolific debt issuers this year, Bloomberg data show, thanks to a slew of multi-billion dollar financings for acquisitions, including Abbott Laboratories’ $15.1 billion deal for its takeover of St. Jude Medical Inc. and a similar-sized offering from Teva Pharmaceutical Industries Ltd. to fund its takeover of Allergan Plc’s generic drug business.
Despite record issuance, investors, particularly beleaguered European and Asian buyers escaping negative-yielding debt, piled into the asset class all year, allowing issuers like Molson Coors Brewing Co. and Nike Inc. to lock in their lowest-ever rates on new bonds.
Just a few years ago, bond sales in excess of $15 billion were relatively rare, but investors have embraced them, said Anne Daley, a managing director on Barclays Plc’s investment-grade syndicate desk.
“The market is definitely accustomed to, aware of, and in many ways used to seeing these large deals,” Daley said. “Given the amount of demand, we’ve been able to manage all of them efficiently in 2016.”
While the acquisition-funding pipeline looks smaller next year, there are still potential blockbusters. Bayer AG has said it may look to both the dollar and euro bond markets to fund its takeover of Monsanto Co. The company has $57 billion in bridge financing that it may replace with long-term debt in the bond market. Investors are also eyeing AT&T Inc.’s bid to buy Time Warner Inc., with its $40 billion bridge loan.
Less certain is whether broad investment-grade credit will still look like a buy under a Republican-controlled government. In recent years, easy-money policies in Europe and Japan have helped bring new investors -- and tighter spreads -- to almost all corners of the asset class. Now, though, monetary policy may play a smaller role in driving returns, said Jeff Cucunato, head of U.S. investment-grade credit at BlackRock Inc., the world’s largest asset manager.
“As we shift into a market that is being driven more by political policy and fiscal policy, it’s a very different environment,” Cucunato said. “The potential for winners and losers due to that is the greatest we’ve seen in a long time.”
So far, credit investors have escaped much pain. In the last days of 2016, the extra yield the notes offer over Treasuries declined to a year-to-date low of 1.23 percentage points, even as government debt has been beaten up by expectations of rising interest rates.
“We’re sitting in a really interesting spot right now,” said Greg Nassour, co-head of investment-grade portfolio management at Vanguard Group Inc., which manages more than $3.5 trillion. “2017 is going to be equally exciting.”