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Why high-grade debt issuance increased more than three-fold

Phalguni Soni

Overview: High-grade borrowers are upbeat about market conditions (Part 5 of 9)

(Continued from Part 4)

High-grade debt issuance

Investment-grade borrowers (AGG) continued to take advantage of favorable market conditions last week. In the week ending August 8, weekly investment-grade bond (LQD) issuance surged by 222%, week-over-week to come in at $24.975 billion over 19 deals. Issuance was driven by refinancing older and costlier debt, acquisition related financing, share-repurchases, and other general corporate purposes (Data source: Bloomberg).

Issuance by sector

Corporates, other than financials, were the dominant issuers in the week ending August 8. They accounted for ~49% of issuance volumes. Financials sector firms accounted for ~38% of issuance. As mentioned in the previous section, Tyson Foods and Synchrony Financial came out with the largest corporates and financials sector firm issues at $3.25 billion and $3.6 billion, respectively.

Other major issuers included financials sector giants Berkshire Hathaway (BRK-B) and Citigroup (C), and tech firm Comcast (CMCSA) at $2 billion.

The consumer sector also saw two other prominent issues besides Tyson Foods—CVS Caremark at $1.50 billion and QVC Inc. at $1 billion. The proceeds from both issues would be used primarily for retiring older debt.

Investment-grade debt issuance by type

Investment-grade (LQD) borrowers continued to prefer fixed-rate debt issues last week—~97% of the total issuance was fixed-rate in the week ending August 8. Only two borrowers issued floating rate notes (or FRNs), both in the financials sector—Citigroup (C) with one tranche of $250 million and Berkshire Hathaway (BRK-B) with one tranche of $400 million.

Typically, borrowers would look to lock-in near record low rates before the Fed embarks on its rate tightening cycle, expected sometime in 2015. This creates the popularity of fixed-rate issues.

Investment-grade debt issuance by quality

Lower-rated investment-grade borrowers—BBB and A-rated—were the most prolific borrowers accounting for over 90% of total issuance in the week ending August 8. Lower-rated investment-grade would also be more vulnerable to rising rates, should the Fed embark on a rate tightening cycle. Increasing issuance by lower-rated borrowers may be a trend you may see in the coming months.

Investment-grade debt issuance by maturity

Ten-year maturities were the most popular tenor last week, accounting for ~32% of the total issuance. Only about 22% of issuance had a tenor for lower than five years. Longer-dated, fixed-rated issues would lock-in low yields for issuers for a longer period, accounting for their popularity.

In the next section, you’ll be able to read about key secondary market trends that are most pertinent for bond investors.

Continue to Part 6

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