High-grade shrugs off high-yield bond woes

By Danielle Robinson

NEW YORK, Aug 8 (IFR) - Why a company like Tyson Foods will jump through hoops to keep an investment-grade rating was made blindingly clear last week, when the high-grade new-issue market shrugged off mayhem in the junk bond market and priced almost US$23bn of deals.

After managing to cling on to its Triple B ratings, Tyson received US$20bn of orders from investors for its offering of US$3.25bn of five, 10, 20 and 30-year notes.

Had it not cared about being junk-rated by one of the major ratings agencies, it would have faced a high-yield market littered with pulled deals and plunging secondary prices as a record US$7bn fled the riskier asset class.

"There has been a huge bifurcation between the two markets," said Jonathan Fine, head of investment-grade debt syndicate at Goldman Sachs. "Although the large outflow number [of US$7bn] for high-yield could make for more challenging times, I don't expect it will stop borrowers from tapping the investment-grade market."

The major difference between the two markets, according to analysts and bankers, is the technicals.

While high-yield bonds have succumbed to over-valuation fears and geopolitical concerns, investment-grade funds have continued to see inflows and benefit from investors seeking high quality as Treasury yields remain low.

"The technical backdrop for investment grade is much stronger than that for high-yield, with the latter more sensitive to total returns and retail fund flows," said Sivan Mahadevan, head of credit strategy at Morgan Stanley in the US. "Investment grade, on the other hand, could see significant institutional demand at higher and lower rates."

When rates are low, money flows out of the Treasury market and into the next highest quality fixed-income asset class - investment-grade corporate bonds. And when rates rise, outflows from retail is offset by institutional investors coming in for the higher yields.

Good execution of deals also goes a long way to generating goodwill in the new issue market.

The sheer weight of orders brought in by bookrunners JP Morgan and Morgan Stanley helped Tyson's deal tighten in 9bp in the aftermarket.

The next day, GE's credit card spin-off, Synchrony Financial, debuted with a US$3.6bn offering of three, five, seven and 10-year notes, which attracted as much as US$17.4bn of demand and tightened as much as 12bp in the aftermarket.

"The performance of Tyson and Synchrony really left a good taste in investors' mouths and now we've seen nine opportunistic issuers come to market today," said one head of syndicate. "Tyson and Synchrony helped to take the focus away from three other deals [Comcast, American Tower and Discover Financial Services] that widened slightly during the week."

The week ahead is expected to be busy, with corporates squeezing in offerings ahead of the usual late August slowdown.

"We expect the new-issue market to stay open [in the weeks ahead], although heightened geopolitical risk could increase the size of new-issue concessions," said Dan Mead, senior syndicate manager at Bank of America Merrill Lynch.

Investment-grade buyers are as concerned as the next investor about geopolitical risks. But with money to put to work, it usually just takes slightly higher new-issue concessions to reel them into new deals.

As in other times of volatility and nervousness, syndicate managers will persuade borrowers to offer some extra spread over fair value, and smooth treasurers' feathers by noting how much the Treasury market has rallied.

(Reporting By Danielle Robinson; Edited by Philip Wright)