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Big Banks Weigh Bond Sales in Risky Market: U.S. Credit Week Ahead

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(Bloomberg) -- Some of Wall Street’s biggest banks are exploring potential bond sales as recession warnings flash red and earnings season gets into full swing.

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This quarter’s bank-bond boom is set to be a tamer affair, with costs rising and the market’s biggest borrowers already ahead of their financing schedules.

JPMorgan Chase & Co. and Morgan Stanley reported second quarter earnings on Thursday, followed by Citigroup Inc. and Wells Fargo & Co. on Friday. Three of the four heavyweights -- JPM, Morgan Stanley and Wells -- missed analyst estimates, piling up pressure on whether or not they will venture into the market. Citi was the sole bank among the quartet to beat estimates, but announced it will suspend stock buybacks to help meet higher capital rules -- a decision already taken by JPM.

“There’s been a lot of issuance already in the first half of this year, so it’s definitely going to be at a slower pace than what we’ve seen,” said Bloomberg Intelligence credit analyst Arnold Kakuda. “I’m expecting JPMorgan to issue more than Bank of America in the coming weeks, because they were slower in the first half of the year.” The latter is expected to report results on Monday. Kakuda also noted that Wells Fargo may remain more active, as it has the most excess capital out of the big banks.

JPM credit analysts Kabir Caprihan and Nikita Dyatlov forecast that the biggest banks will sell between $14 billion and $16 billion of bonds this month, well below the roughly $19 billion that made July the fourth-highest month for debt sales from Wall Street stalwarts, the analysts wrote in a note dated July 6. Financials currently account for over 50% of high-grade issuance, so a lower-than-usual quarter would slow overall corporate issuance further.

As the bond market searches for some stability in prices and Treasury yields, summer investment-grade debt sales are likely to remain subdued with some credits taking advantage of more positive earnings reports, Bloomberg’s Michael Gambale wrote. Projections for next week call for $25 billion to $30 billion including bank issuance, or $10 billion to $15 billion without.

Four borrowers sold about $10 billion in new debt in a volatile week with inflation-data rattling the markets. PepsiCo Inc. led the subdued week, issuing $2.5 billion of bonds which included a rare green tranche. The primary market missed weekly forecasts, the fourth underachieving week in the last five. With half of July over, volume is a paltry $23.65 billion, well under an estimated $80 billion, which is highly unlikely to be met.

High Yield

There is only one high-yield deal in syndication, the proceeds of which will help fund the buyout of metal roofing company Cornerstone Building Brands Inc. Both Deutsche Bank AG and UBS Group AG are leading marketing on the $600 million secured high-yield bond, along with a $410 million leveraged loan. The loan is being offered at a discounted price of 93 cents on the dollar, while early pricing discussions on the bond is at 92.4 cents, which equates to a yield of 10.5%. Both parts are expected to wrap next week.

Bank of America Corp. has also started sounding out investor interest for a portion of the $15 billion debt package supporting the buyout of Citrix Systems Inc. by Vista Equity Partners and Elliott Investment Management. The bulge-bracket bank is leading syndication for a $7.05 billion leveraged loan, with pre-marketing potentially kicking off as early as next week.

Meanwhile, junk bond investors turned cautious, pulling $652 million from US high-yield funds after an inflow of $889 million in the previous week. Barclays Plc remains “bearish on spreads,” and estimates default rates of 3.5-4% for high-yield bonds over the next 12 months.

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