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High-grade monthly: Issuance remains hot in June as low costs entice borrowers

U.S. high-grade issuance topped $100 billion for an unprecedented sixth consecutive month in June, capping volume for the first half of 2021 at $775 billion, according to LCD, as borrowing costs again ticked lower.

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Issuers continue to swarm the marketplace to bolster their liquidity positions and extend their debt-maturity profiles, as the Fed remains accommodative in the face of emerging inflation threats. While that first-half total was down 32% from a record-setting $1.14 trillion for the same period last year — when Fed liquidity programs rolled out last March triggered an initial tidal wave of issuance — this year's pace is still the second fastest of the past decade. The pre-pandemic peak for issuance over the first six months of a year was $672 billion, in 2016, a level nearly matched by the $670 billion in 2017.

Issuance for the first half of 2021 was up more than 37% versus the $565 billion priced in 2019, LCD data show.

LCD's high-grade issuance totals exclude deals priced by sovereign, supranational, and government agency issuers, as well as borrowers operating under a controlling interest by a sovereign entity. The totals also exclude hybrid debt/equity instruments, such as preferred stock and convertible notes.

The June total, at $112.8 billion, was firm to syndicate projections for the month, one of several upside surprises recorded so far this year as corporate yields skip along near all-time lows. The $192.3 billion priced in March 2021 — when Treasury yields flinched higher amid inflation warnings — was the fourth-highest monthly total on record, trailing only the record early pandemic totals from March to May last year.

On a quarterly basis, the $352.7 billion priced from April to June this year moderated from the $422.2 billion in the first quarter, and it was down from the record $668 billion in the second quarter last year. The total from the second quarter of 2021 was nevertheless up from second-quarter totals of $256.6 billion in 2019, $321.9 billion in 2018, $287.3 billion in 2017 and $321.2 billion in 2016.

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Even as the FOMC, at its June meeting, moved up its expected initial post-pandemic rate hike to 2023, from 2024, borrowing costs fell for corporate borrowers in the closing weeks of the quarter. Issuers paid an average 2.14% at issuance for new U.S. high-grade bonds in June, down from 2.32% in May, and at the lows since the 2.10% average for February 2021, and the nadir at 1.71% in January 2021. For context, issuers paid 2.48% at issuance in June 2020, and 3.59% in June 2019.

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Those low costs also reflect unwavering demand for bonds up and down the credit-quality ladder, as investors reach for yield. The spread for the S&P U.S. Investment Grade Corporate Bond Index touched a new long-term low at 79 bps over Treasuries, or T+79, in the closing sessions of June, marking the tightest levels so far in the pandemic. That spread was T+90 at the end of March, T+94 at the start of this year, T+149 on June 30, 2020, and T+366 at the crisis heights on March 23, 2020, when the Fed unveiled its game-changing corporate liquidity facilities.

Against those low costs, issuers in June printed $38.5 billion of bonds explicitly backing refinancing efforts, a second-quarter high. By share of total issuance, refinancing-driven activity accounted for roughly 34% of June volume, a high since the 35% level in March, and the 42% recorded in February.

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Meantime, issuance backing M&A efforts is steadily mounting after a fallow year for acquisitions in 2020. Salesforce.com Inc. completed June's largest high-grade offering, an $8 billion, six-part offering on June 29, primarily backing its impending acquisition of Slack Technologies Inc. That capped the first-half total for M&A-driven IG bond issuance at $115.5 billion, up from $76.9 billion for the first six months last year.

While leveraging M&A transactions historically have necessitated some pricing concessions to investors to stoke investor support, Salesforce.com priced its deal in line with comparable secondary-market indications, in an illustration of adamantine demand for corporate new-issue supply at the end of the quarter. The spreads it paid over Treasuries rank near the lowest ever paid by corporate borrowers, including a T+50 spread for a 1.95% 10-year tranche, which made the company one of only nine issuers over the last decade to price a 10-year issue at that spread level or lower. (The Procter & Gamble Co. set the low bar in April with new 10-year notes priced at the same 1.95% coupon rate, but at a T+42 spread.)

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Meantime, financial-sector issuance remains in high gear, as domestic banks address stiffening regulatory capital standards while they ramp up shareholder returns against the quickening economic recovery, and as Yankee financial issuers take advantage of low costs on the U.S. marketplace. Financial-sector issuance was roughly $50 billion for June, up from $45 billion in the year-ago period. The $306 billion of financial-sector supply for the first half this year accounts for nearly 40% of total issuance, versus less than 30% for all of 2020, LCD data show.

Notably, JPMorgan Chase & Co. was the largest single issuer over the first half, as it priced six benchmark deals in as many months, totaling $29 billion. That total included its largest-ever deal, a $13 billion print in April. Bank of America Corp.'s $26.25 billion of issuance in the first half — including the largest-ever bank-sector offering, a $15 billion placement in April — made it the number two issuer. Verizon Communications Inc. was third on that list, at $25 billion, reflecting one offering in March in the wake of its $52.9 billion play for 5G spectrum assets at a 2021 FCC auction.