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High-grade monthly: Brisk issuance continues as rates settle, spreads tighten

High-grade issuers took big swings on the U.S. primary market stage in April, as underlying rates consolidated following the sharp rise in yields in the first quarter. Issuance totaled $109 billion for the month, or the second-highest April total on record, behind only the still-unprecedented $276 billion priced in April 2020, amid torrential issuance following the Federal Reserve's March 23, 2020, announcement of pandemic-related corporate liquidity backstops.

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April is typically a seasonally subdued period, as issuers retreat to the sidelines in advance of first-quarter earnings reports. Issuance tends to favor Yankee issuers over the first half of the month, with domestic issuers following over the final two weeks, led by domestic bank issuers.

That pattern held in the early part of April this year, as issuance totaled a modest $30 billion from April 1-14. That total included only half a dozen deals totaling $2 billion or more, with Toyota Motor Credit Corp. placing the largest transaction at $2.5 billion.

The turn came April 15, when bank-sector issuance volume exploded on the heels of potent first-quarter earnings, which included substantial releases of credit loss reserves to reflect a faster-than-expected economic recovery in 2021. However, several banks on earnings calls pointedly addressed regulatory capital needs as the Fed tightened requirements that it had previously loosened in the face of economic disruptions last year.

U.S. banks, in just three sessions, combined to price $43 billion of new supply. On April 15, JPMorgan Chase & Co. priced a $13 billion, five-part deal, which at the time represented the biggest-ever deal priced by a bank-sector issuer. The Goldman Sachs Group Inc. inked $6 billion of new notes on the same day. One day later, Bank of America Corp. completed a $15 billion transaction, and on April 19, Morgan Stanley priced a $7.5 billion placement, alongside a $1.5 billion print for The Bank of New York Mellon Corp.

Citigroup Inc. added a $5.5 billion placement late in the month. For all of April, financial-sector issuance totaled more than $67 billion, which was ahead of the $64 billion total in April 2020. Conversely, the roughly $42 billion of nonfinancial issuance for the month was just a sliver of the $212 billion total last April.

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Meantime, the biggest nonfinancial deals in April came from Tencent Holdings Ltd. ($4.15 billion), Taiwan Semiconductor Manufacturing Co. Ltd. ($3.5 billion), and The Coca-Cola Co. ($3.45 billion).

Coca-Cola underscored a reality that, even after a string of liability management exercises in recent quarters, there's more that can be done in the current environment to optimize capital structures. The beverage giant's offering included a tap of its 3.00% bonds due March 5, 2051, at T+80, or 3.096%. It reopened the issue very near the 3.08% yield it netted at pricing for the initial tranche on March 1 this year and achieved tighter spread execution.

Proceeds of the offering — alongside those of a €1 billion, two-part deal — partially back the intended redemption of $4.25 billion of dollar-denominated notes and €2.2 billion of euro-denominated notes via a concurrent debt tender. It was Coca-Cola's fifth benchmark placement in the COVID era, four of which it used to term out existing debt. Its last three deals — including a $2.5 billion issue in March and $4.1 billion placement last September — have helped clear the company's debt maturities through 2026.

Coca-Cola's attractive financing conditions were reflected in the low yields for new high-grade offerings last month. April's new issues averaged 2.19% at pricing, part of a 2.10%-2.23% range over the last three months, after an uptick from the crisis-era low at 1.71% in January. The April average last year was substantially higher, at 3.46%.

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Firm spread progressions continue to abet the low-rate environment. Prominently, The Procter & Gamble Co. on April 21 netted the tightest new-issue spread (T+20) for a five-year issue on record, even as it paid higher coupon rates relative to comparable placements last October.

At the index level, the S&P U.S. Investment Grade Corporate Bond Index closed out April at a spread of T+87 and a yield to maturity of 2.11%. That compared with T+90 and 2.20% at the end of March. The yield level was up versus an average at 2.00% for the first four months of the year, while spreads continued firm to a T+91 average for the same year-to-date span. The month-end spread was just shy of the pandemic-era low at T+86, recorded in February.

LCD's issuance total for April — which excludes the month's substantial volumes of deals from sovereign/state-controlled, agency, supranational issuers, and/or hybrid issues with both debt and equity characteristics — was ahead of most syndicate projections, which centered on the $100 billion area, per a syndicate survey from Mischler Financial's Ron Quigley.

Looking ahead, the survey's midpoint projection for May is roughly $141 billion, which would be down from the May-high of $235 billion in May 2020, but still well ahead of May totals in 2019 ($105 billion) and 2018 ($112 billion). Participants in the survey noted constructive underpinnings for the marketplace at the start of the month, even as inflation risks overhang total return prospects for the sector. Issuers over the final two weeks of April, on average, placed new deals at spreads near to, or tighter than, comparable issues on the secondary market amid ravenous, risk-on demand for spread products up and down the ratings ladder.