Outlook 2016: Another record year for high-grade issuance; supply to be front-loaded in 2016

By Aleesia Forni

New York, Dec. 31 – The flood of supply that the U.S. investment-grade bond primary market saw in 2015 is expected to carry over into the coming year, with predictions for issuance during the 2016 calendar year ranging from $1 trillion to $1.4 trillion.

Barclays forecasts investment-grade fixed-rate issuance to be lower in the coming year compared to the amount seen in 2015, predicting around $1.34 trillion of issuance, down 2% from its 2015 total.

Additionally, it expects financial issuance to remain flat, “driven by a substantial pickup in U.S. bank issuance, and offset by a decline in Yankee financial issuance.”

Barclays expects a decrease in issuance from both non-financials and non-corporates by 3%, respectively.

Merger and acquisition financings are expected to make up a large portion of 2016’s total, according to sources, and the bulk of the year’s supply is expected to come early during the year.

“It’s possible we could see another record-breaking year,” a market source said.

However, sources also note that a very fragile market backdrop and any additional action by the Federal Reserve could play a part in the amount of issuance seen in the year ahead.

2015 breaks records

More than $1.34 trillion of new issuance entered the high-grade primary market during the 2015 calendar year, making it the largest year for issuance on record.

This figure tops the roughly $1.09 trillion of new issuance sold during 2014, which broke the record set in 2013 of $1.01 trillion and follows the $960.48 billion of high-grade bond issuance seen in 2012.

The amount of supply the investment-grade market has seen in the recent past continues to affect credit valuations and contributes to its underperformance, according to a report from Barclays.

Still, the pace of issuance is expected to continue to remain at “historically high” levels in the coming year.

Fed hikes rates

The year also saw the Federal Reserve raise interest rates for the first time in nearly a decade in December, signaling confidence in the U.S. economy.

Following the conclusion of its two-day policy meeting, the Federal Open Market Committee voted unanimously to hike its key interest rate from a range of 0% to 0.25% to a range of 0.25% to 0.50%, a move that was widely expected.

“No one can be sure what impact it will have on the market,” one market source said.

The Federal Reserve also made a point to note that any further rate increases in the future would come gradually.

Many investment-grade companies prepared for the interest rate hike by entering the primary market during the previous year to lock in funding costs at current rates.

With the timing for the next interest rate hike uncertain, many participants expect the high-grade market to be flooded with new issuance during the front end of the coming year.

“Expecting a very strong appetite at the start of the year,” a market source said.

Players are calling for between $110 billion to $120 billion to come to market in January alone.

“Very, very busy,” one market source said of the coming month. “Expecting [new issuance from] Yankee issuers and large financials.”

Euros more attractive

The Federal Reserve’s rate hike decision could push some potential borrowers to access the euro bond market to secure their financing needs.

With the Federal Reserve planning to increase interest rates gradually over the course of the year, doing bond deals in euros as opposed to entering the dollar market may be “a more attractive option,” a market source said.

Still, according to a report from Bank of America, U.S. high-grade benefits from global weakness, noting that persistent yield differentials between U.S. and other nations should drive foreign investors into the U.S. market.

“We believe the growth of the foreign buyer will be a powerful tailwind for U.S. investment-grade credit next year,” said Barnaby Martin, head of European credit strategy at Bank of America.

Bank of America noted optimism in U.S. high-grade bonds, citing attractive valuations and improved fundamentals.

“The latter quality was missing in the summer as companies raced to beat the Federal Reserve’s anticipated rate increase; as the Fed acts, that quirk should disappear,” analysts said in a report.

Large M&A deals forecasted

Large merger and acquisition financings that dominated the primary landscape in 2015 will likely continue in the year-ahead.

Actavis Funding SCS and AbbVie Inc. were among the names issuing multi-billion dollar deals to fund proposed acquisitions during the previous year.

Actavis Funding priced $21 billion of senior notes in early March in 10 tranches to fund its acquisition of Pharmacyclics Inc. in what was the second-largest bond offering on record.

Both deals generated stellar demand, with AbbVie attracting more than $60 billion of orders, and Activis seeing an order book that topped $90 billion.

Other large M&A deals priced during the year came from Visa Inc., Reynolds American Inc. and Charter Communications Inc.

“Consolidation has been a major theme this year, particularly in the health care and pharmaceutical sectors,” according to a report from Barclays.

Looking forward, sources predict a number of slated merger and acquisitions deals to be pulled forward to the earlier portion of the year in order to access the market without concern regarding any additional action by the Federal Reserve.

Among the potential issuers, a megadeal from Anheuser-Busch InBev NV could enter the primary market in order to fund its roughly $106 billion acquisition of SABMiller.

Oil prices in focus

Tumbling oil prices took a toll on energy trades late during the 2015 year and will continue to be a focus for players in the coming months.

Oil prices fell below $35 per barrel in December on concerns of a global supply glut, putting pressure on energy names in the secondary market.

Schlumberger Holdings Corp. and Marathon Petroleum Corp. each saw pushback from investors while pricing their respective bond deals in early December.

Tranches on Schlumberger’s $6 billion five-part deal were each tightened by just 8 basis points compared to initial price thoughts, and Marathon saw the spread on its 30-year tranche widen by around 20 bps at the guidance stage, while pricing on its three- and five-year tranches was unchanged from initial thoughts.

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