Outlook 2011: New-deal volume set to drop in coming year; sovereign debt weighs on tone

By Andrea Heisinger

New York, Dec. 31 - Issuance in the high-grade bond market declined in 2010 from the previous year, and that trend could continue into 2011, sources told Prospect News.

Sources also said there were no big surprises in the market in 2010 and that there could be even less excitement in the coming year since many companies already pre-funded to take advantage of low interest rates in the latter half of the past year.

While 2009 had several huge bond deals from pharmaceutical and bank names, that was mostly missing from the market in 2010 and could be missing in 2011 as companies remain cautious, syndicate sources said.

According to Prospect News data, there has been $856.54 billion of bonds priced in 2010. There was $1.05 trillion for the same time period in 2009, the data showed.

"I don't think 2011 will be in line with that [deal total]...maybe smaller," a syndicate source said.

"We're expecting stronger sentiment for high-yield bonds because they are seen as having a better return. There's not drastic [volume] change expected for 2011. We're looking at about $700 billion, give or take $30 billion."

Many companies have already prefunded this year for maturities in 2011 to take advantage of low interest rates.

"Unless M&A activity picks up, we shouldn't see much change," the syndicate source said. "Financial names away from us have big deals coming in 2011, we've heard."

2011 issuance could drop 10%

While a precise amount of new deals for 2011 is hard to pin down, sources said, everyone agreed that there will likely be a downturn in volume.

"We're expecting about $880 billion to $890 billion in 2010," said Jamie Guenther, managing director and head of institutional credit at Deutsche Bank.

"It's expected to be down for 2011. This is largely the result of good issuance in the last quarter [of 2010]."

There are a lot of companies sitting on cash, Guenther said, adding that "a lot were getting in with rich levels."

Cash at non-financial companies is the highest on percentage than in the last four years, he said.

"They could use some of that for acquisitions and infrastructure," Guenther said.

Barclays Capital is also expecting about a 10% dip in gross fixed-rate issuance at $810 million, including non-corporates, according to spokesperson Seth Martin.

Industrials are expected to see the largest drop, and deal volume from financials in 2011 is expected to stay close to flat.

Guenther from Deutsche Bank said that the high-grade market could see about $750 million of deals in the coming year, or a 10% decline.

"We're seeing a deleveraging in the financial sector," he said.

It's still too soon to worry about all of the government-backed bonds issued in 2009.

"That will be more 2012 and 2013 [when they are due]," Guenther said.

Industrial names led the past year's issuance volume, but that could change in the coming year, a syndicate source said.

"The tone in 2011 could be led by retail and consumer names," he said.

E.U. mars past year

The sovereign debt crisis with several countries in the European Union wreaked havoc on the high-grade bond market in 2010.

"There was a concern in the spring, when Greece became an issue," Guenther said. "There was a turnabout in risk-taking. You had to be mobile. There's much more opportunity for investors with systemic issues."

By the time fears of Ireland's debt came about in the latter half of the year, "the market figured out how to shrug off the market systemic risk," he said.

It was a very headline-driven market in 2010, said a sellside syndicate source.

"We're probably going to keep seeing cycles," he said. With Greece, Ireland and Portugal, "a lot of people knew the problems were there, so that wasn't really a surprise."

The source added that "the market is still fickle - or fragile."

Fears of sovereign debt remain for 2011, according to analysts at Barclays Capital.

In the 2011 outlook, analysts wrote that European sovereigns and the possibility of higher interest rates and China's tightening policy are the biggest causes for concern. Sovereign funding issues will be a problem until the E.U. announces a more comprehensive plan for countries where spreads have spiked in the past month, the report said.

Record-low coupons

Several corporate issues set record-low coupons in late 2010, and they will likely not have competition in 2011.

They were "grabbing for coupons," as one syndicate source said.

"The general sentiment is that the sell-off was exaggerated," a source said. "It's hard to predict rates - if I could I'd be on the buyside, not the sellside."

There will probably not be any more rallies related to coupons, the syndicate source said, adding that there will be no new lows on the three-year and 10-year maturities for a while.

"It's very hard to see the market lead to another rate rally. It's very difficult to forecast," the source said. "3.5% is a good coupon ceiling for the 10-year."

There is also more quantitative easing speculation, the source said, after QE2 saw backlash from the media.

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