2014-03-14

--Supply Expected to Drop To Half-Speed Next Week --Russia's Credit Spreads Gap Wider

By Steven Levine

NEW YORK (MNI) - New investment-grade corporate bond issuance continued to mount this week, while the U.S. credit market staged a marginal recovery from a bout of mild risk aversion ahead of the weekend.

Issuers to date have been taking advantage of the still-ultra low U.S. interest rate landscape to bring new deals to market, largely due to fears about a back-up in interest-rates, as the Federal Reserve scales back on its large-scale asset purchases, analysts said.

An additional $44.33 billion of fresh, high-grade corporate, supranational, sovereign and central bank debt priced this week, just north of the topmost estimate for $40 billion. But after a massive sales sum of nearly $100 billion thus far this month, the pace of supply in the week ahead is expected to slow to about half-speed.

Investment-grade corporate bond supply is set to fall within the range of $15 billion to $20 billion in the week ahead, if market conditions remain sufficiently calm.

"After the past two weeks of supply, we're due for a slowdown," said one investment-grade corporate debt syndicate manager. "It has less to do" with the overseas unease from Ukrainian-Russian tensions and fears about China's growth, than it does with the recent ton of transactions, he said.

Indeed, by Friday, the majority of deals priced this week widened on a cash spread basis due in part to the swarm of new offerings.

"Taking a look at the secondary trading performance" of this week's new issuance "we note a bit of indigestion and global tumult pushing spreads wider," noted Ron Quigley, head of fixed-income syndicate at Mischler Financial Group.

Of the 54 deals that printed, 22 tightened from their new issue pricing for a 40.75% improvement rate, while 48.25% widened, and 9.00% were trading flat, he added.

Bond investors' interest in higher-yielding investment-grade corporate debt this week generally seems to have heightened.

More than half of the $44.33 billion of new supply this week was comprised of triple-'B' rated issuance; and most of the deals were issued by names from the financial sector. The level of lower-in-credit-quality bonds rose about $1.5 billion this week from the $21.90 billion 'BBB'-tally last week.

But while many fixed-income investors continue their hunt for yield, and have generally stepped down the credit quality ladder, there remains a dearth of new issuance in certain U.S. consumer asset-backed securities.

According to Standard & Poor's Ratings Services U.S. ABS 2014 Outlook & Hot Topics event Tuesday, S&P expects U.S. ABS issuance in 2014 to reach $165 billion, a far cry from its pre-financial crisis levels.

Auto-related ABS, which "accounts for a significant share of all new" U.S. consumer ABS is set to reach $93 billion in 2014, up from $88 billion in the prior year, but below the recent $99 billion level in 2012, and well under the $114 billion and $103.3 billion marks set in 2005 and 2006, respectively.

Also, credit card ABS issuance could reach $40 billion in 2014, up from $35 billion in 2013, "depending on final regulations and their impact on banks' motivation to fund through securitization," S&P noted. Prior to the financial crisis, credit card ABS issuance hit more than $93 billion in 2007.

Supply of student loan ABS is expected to decline further in 2014 to about $15 billion, after a $9 billion year-over-year fall to $21 billion in 2013, "due to a decrease in Federal Family Education Loan Program (FFELP) securitization," S&P added.

Meanwhile, sentiment about investment-grade corporate credits improved somewhat Friday, amid lingering uncertainties about China's growth, as well as the direction of Russia's involvement in the Ukraine.

"Emerging market names are not so lucky, and it remains the most vulnerable asset class to a negative shift in sentiment," said Gavan Nolan, director of credit research at Markit, in a note to clients.

"Ukraine's problems have so far failed to trigger contagion, with Russia the only sovereign seeing considerable spread widening. China is a different matter, and its disappointing economic figures released recently are concerning investors in both developed and developing markets," he added.

Perception about different emerging market countries' abilities to repay their sovereign debt obligations varied this week. Recent quotes on some EM sovereign 5-year credit default swap spreads and changes on the week reflected a meaningful deterioration in Russia's perceived creditworthiness:

Ukraine 1271.17 bps, -59.00 bps Russia 278.75 bps, +44.70 bps Turkey 250.50 bps, +16.20 bps South Africa 212.75 bps, +10.50 bps China 99.28 bps, +11.09 bps

Despite the volatility overseas, the risk-taking tone in the U.S. turned relatively calm ahead of the weekend.

By the afternoon, the North American index for investment-grade credits, the IG.21, was about 0.53 basis points tighter on the day at just north of 66.64 bps. Although the index has widened by a little more than 4.0 bps from this week's tight set Tuesday, it remained improved by around 7.5 bps from its 2014 wide of 74.078 bps reached Jan 27.

"Credit seems to be having one of those glass-half-full/glass-half-empty moments," noted Citigroup credit strategists Jason Shoup, Sonam Pokwal and Swati Verma.

"On one hand, there seems to be growing evidence that the IG credit market in the U.S. has started to become a net beneficiary of the flows out of EM, which continue apace. Even as Ukraine remains at the forefront of geopolitical concerns, markets appear inclined to fade any systemic read-through that could impact U.S. credit," they cited.

"Yet viewed another way, the exodus of mutual fund money invariably places more emphasis on institutional investors to keep valuations stable. Should they start to sell at the behest of their clients, it's difficult to imagine that DM credit remains unscathed, especially if the situation in Ukraine escalates after this weekend's Crimean referendum," Citi added.

The unease in Eastern Europe, coupled with Chinese growth jitters and the massive uptick in new supply, spurred investment-grade corporate bond cash spreads a little wider this week.

By Friday afternoon, spreads were mainly 1-5 bps wider on the day among the most actively traded, according to MarketAxess.

Cisco Systems, Inc.'s 1.100% notes due Mar. 2017 were last 2 bp wider on the day at a spread of 28 bps more than matched-maturity U.S. government debt (5 bps wider on the week);

Bank of America Corp.'s 4.125% bonds due Jan. 2024 were last 1 bp wider on the day at a spread of 129 bps more than U.S. Treasuries of similar maturities (6 bps wider on the week); and

BlackRock, Inc.'s 3.500% 10-year notes were last 1 bp wider on the day at a spread of 90 bps more than comparable U.S. Treasuries (2.5 bps wider than their initial price level Thursday).

Total estimated trading volume was last around $8.70 billion. To date in March, average monthly volume is about $16.10 billion, up from $14.36 billion in February.

The yield on the 10-year U.S. Treasury note reached an intraday high of 2.663% from a morning low of 2.611%, according to one broker screen. The yield on the note fell a little more than 14.0 bps from its overnight high Monday of 2.804%.

Looking ahead, the pace of new investment-grade corporate bond issuance announcements will likely be interrupted by the release of the Federal Open Market Committee's monetary policy statement, projections and press conference Wednesday.

Potential offerings are in the pipeline from Mizuho Financial Group, Inc., Alfa, S.A.B. de CV, the Republic of Indonesia and BBVA Bancomer SA, according to sources.

In the agency bond market, Freddie Mac is scheduled Thursday to announce its Reference Note issuance decision. The agency in late Feb. priced $1 billion in a reopening of its 0.875% Reference Note due Feb. 22, 2017. Those notes were last bid at a spread of 3 bps more than comparable U.S. Treasuries, according to one broker screen.

For a full list of investment-grade debt offerings, visit the US$ Credit Supply Pipeline, an abbreviated list of which is appended below.

Investment-grade $250M+ Deals Announced/Launched(#)/Priced(*)/Pass(X)

Date $MM Issuer/CR/Description Mat Yield Leads 03/13 1000 *BlackRock (A1/A+) 10 Sr T+87.5 BAML/DB/HSBC/MS 03/13 1000 *American Express Credit (A2/A-) 5 FRN 3mL+55 BAML/C/CS/JPM/RBS 03/13 1250 *American Express Credit (A2/A-) 5 fxd T+65 BAML/C/CS/JPM/RBS 03/13 3000 *CADES (Aa1/AA+(F) 10 MS+63 BNP/CS/GS/JPM 144A Reg S, French state social debt agency Caisse d'Amortissement de la Dette Sociale 03/13 RDS Mizuho Financial Group (A/A-(F) 10 sub 144A Reg S Road Show to start 3/17 in US/Eur/Asia

--MNI New York Bureau; tel: +1 212-669-6439; email: slevine@mni-news.com

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