Outlook 2019: Rates, oil, quiet December occlude 2018 junk issuance; outlooks cautious

By Paul A. Harris

Portland, Ore., Dec. 31 – The big banks appear to be looking for high-yield bond issuance in 2019 to come in flat to or lower than the past year, according to a survey of bank projections by Prospect News.

The magic number for projected 2019 high-yield issuance appears to be $200 billion among several estimates from some of the major high-yield players provided by news sources and market contacts.

That number estimates the absolute ceiling among five of the big banks, although one, Goldman Sachs, forecasts substantially less 2019 issuance.

Perennial league table leader JPMorgan is among the most bullish at $200 billion. In a note to investors JPMorgan refers to that issuance amount as being flat year over year and notes that interest rates will remain the primary concern in fixed income in 2019, rendering the loan asset class an attractive allocation within fixed income.

Citigroup also forecasts $200 billion of 2019 issuance.

Barclays looks for $180 billion to $200 billion, down slightly from 2018. Barclays looks for bond refinancing to comprise $75 billion to $80 billion of that amount, with bond-for-loan refinancing coming to $45 billion to $50 billion, M&A/LBO financing $35 billion to $40 billion, general corporate purposes/capital expenditures $15 billion to $17 billion, dividends and stock repurchases $5 billion to $10 billion, with the remaining $4 billion to $6 billion for other uses of proceeds.

BofA Merrill Lynch forecasts $185 billion of 2019 new issuance and mentions a potential for a subsequent uptick later next year, which might take issuance as high as $200 billion.

As mentioned above, Goldman Sachs had the lowest number seen, at $150 billion. In a note to its investors Goldman said it expects refinancing volumes to likely remain low, reflecting debt reduction plans among large issuers, as well as a continued shift in the financing mix, into the leveraged loan market. And while high-yield M&A activity may rebound from 2018’s anemic volumes, it doubts that such activity will provide a meaningful boost to issuance volumes.

Other syndicate desks canvassed in the ultra-quiet post-Thanksgiving period tended to forecast issuance lower than that seen in 2018.

One senior syndicate official, who perennially watches from a high position on the high-yield league tables, gave the most bullish back-of-the-envelope estimate: $250 billion.

How 2018 played out

Action in the high-yield new issue market faded throughout the autumn in 2018 and then disappeared altogether.

The post-Labor Day period got underway with respectable enough volume.

September came in as the third-biggest month of the year with $18.26 billion.

However, October fell off sharply, to $10.76 billion.

A slumbering November put up just $3.55 billion of issuance, the first month in nearly three years to fall below $5 billion.

Then came December, with the sound of one hand clapping. December 2018, at this writing, was on track to become the first month in over a decade to come and go with no new issues clearing the market.

December’s goose egg capped the slowest year in the new issue market, $169 billion, since 2009, which saw just $150.12 billion.

The outgoing year is also the first to price less than $200 billion since 2010, the year following the subprime mortgage meltdown on Wall Street and the Lehman Brother bankruptcy.

The outgoing year hit an early crescendo.

January – 2018's biggest month – saw $25.68 billion.

Heading into Valentine’s day, a bet that only one other month of 2018 would top the $20 billion mark would likely have found few takers. However, it would have been a winning bet.

Only one other month in the outgoing year, March, topped that threshold, turning out $24.8 billion.

The biggest week of 2018 came, uncharacteristically, in the Dog Days of August.

The week of Aug. 6 saw $12.33 billion of issuance, the only week of the outgoing year to top the $10 billion mark.

That week included the Banff Merger Sub, Inc. $1.48 billion deal backing the BMC Software buyout by KKR.

It also included a $2 billion two-part debt refinancing deal from HCA Inc.

Marriott Vacations Worldwide and WellCare Health Plans brought $750 million apiece.

On either side of the Labor Day divide the 2018 primary market at least appeared healthy, if not quite robust.

However, beginning in October issuance swan dove, leaving plenty of time for market watchers to ask one another “What happened to 2018?”

Rates and crude

Perhaps not coincidentally 2018 got underway with a promise from the Federal Reserve Bank that interest rates would march higher, market sources recounted.

Rates which sat flat-lined around ¼% from early 2010 through 2016, began heading higher in early 2017 and continued doing so 2018.

And the word from Fed chairman Jerome Powell was that rates would continue their march well into 2019, with as many as four rate hikes during that 12-month period.

Following the Sept. 26 meeting of the Federal Open Market Committee, which saw the Fed Funds rate move to 2¼% from 2%, the primary market, which had a pipeline of opportunistic refinancing deals and committed merger and acquisition deals pending, began to undergo serious recalibration, a sellside source recalled.

It was at that point that long-dormant expressions such as “managing issuer expectations” crept back into the conversation taking place on the high-yield syndicate desks, the source added.

Executions became more challenging. There were delays and postponements.

Heading deeper into the autumn there was a whiff of price discovery in the primary market.

And an asset class staggered by an upper cut from central bankers, in the form of higher rates, also caught a solid jab to the noggin that came from the direction of the oil patch.

Energy, which represents 15% of the high-yield index, began struggling in earnest when the price of crude oil crashed for the second time in a decade.

The barrel price of West Texas Intermediate Crude, which peaked at $76.41 on Oct. 3, was trading just above $49 on Dec. 17.

It is difficult for the high-yield market to operate smoothly during periods of prolonged weakness in energy prices, an investment banker formulated.

Weak technicals

The technicals of the leverage markets were dire heading into year-end, sources say.

The dedicated high-yield bond funds sustained a whopping $40.2 billion of net outflows in the year to the Dec. 17 close, a bond trader said.

The actively managed high-yield funds suffered the lion's share of those redemptions: $30.3 billion.

High-yield ETFs sustained $9.9 billion of outflows in 2018, with two weekly reporting periods remaining in the year.

Back-loaded January

Syndicate bankers don’t see the new year roaring off the starting line, with informal estimates for January issuance running from $5 billion to $15 billion.

Even the high end of those estimates, $15 billion, would represent a big decrease in year-over-year January activity.

As mentioned above, January 2018, the outgoing year's biggest month, saw $25.68 billion.

January issuance, going back to January 2008, has averaged $18.4 billion, according to Prospect News data.

Perhaps surprisingly, the biggest January did not come in the record-setting year of 2012. That year, which would end up being the biggest year for junk issuance in the history of the market, with $325.15 billion, got underway with a just-above-average January: $21.36 billion.

The following January, 2013 – perhaps an extension of the record setting year of 2012 – was the biggest January to date at $30.19 billion. In any case, 2013's $324.47 billion of issuance came within a whisker of the 2012 record.

Seven of the past 11 Januarys generated in excess of $20 billion.

The lowest amount of January issuance came, not surprisingly, in 2009, which saw $4.87 billion. That January fell slightly more than three months after Lehman Brothers filed for Chapter 11 bankruptcy protection, on Sept. 15, 2008.

Early January 2019 is unlikely to be busy, and may not be active at all, according to one syndicate banker, who spoke just ahead of the December holidays.

It is apt to be a back-loaded month, with most of its activity coming in the final two weeks, the banker said.

What it will take is one decent-sized deal – perhaps a deal from the modest pipeline of committed financings that was in place, heading into the new year – receiving an execution that everyone can get comfortable with, and then trading well, the official added.

Europeans see oversold market

The European new issue market could be staging for a meaningful regeneration of business in January – in fact, January could be a big month in the euro market – a London-based senior syndicate official said.

Investors in Europe are beginning to take the view that junk is oversold, the source added.

The European market entered correction slightly before the dollar-denominated high-yield market did so and appears on a trajectory to pull out of the current stall ahead of its American counterpart, the banker said.

Just as in the United States, there are committed financing deals expected to come to market during January.

If those deals go well, January could be a busy month, the banker said.

European investors have seen that the sell-off in high yield has gone too far and believe that the market is now attractively priced, the official asserted.

The banker also looks for global issuers, more accustomed to appearing with dollar-denominated deals, to continue showing up in the euro market in order to raise cash, a trend that emerged during 2018, as rates in the United States began their ascent.

“For investors, euros are more attractive than dollars right now,” the source remarked.

Also, as in the United States, a big onslaught of negative geopolitical headlines – Brexit, for example – could serve to inhibit or derail the new issue market in Europe, the banker noted.

© 2015 Prospect News.
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