Morning Commentary: United Technologies continues calls; supply weighs; inflows up

By Cristal Cody

Tupelo, Miss., Aug. 10 – The high-grade primary market stayed mostly quiet early Friday following heavier than expected volume during the week that beat syndicate forecasts.

United Technologies Corp. (Baa1/A-/) will continue the second day of a two-day round of fixed-income investor calls on Friday for an offering to fund the company’s acquisition of Rockwell Collins, Inc., a market source said.

BofA Merrill Lynch, HSBC Securities (USA) Inc. and Morgan Stanley & Co. LLC are the arrangers.

The Hartford, Conn.-based provider of technology products and services to the building and aerospace industries is expected to issue $14 billion of new debt to fund the cash portion of the acquisition of Rockwell Collins, a deal valued at about $30 billion.

An offering also is expected in the near future from Elanco Animal Health Inc. (Baa3/BB+/), which held fixed-income investor calls on Thursday for a potential $2.5 billion offering of senior notes to finance the Greenfield, Ind.-based animal health products company’s spin-off from Eli Lilly & Co., according to a market source.

Citigroup Global Markets Inc., Goldman Sachs & Co. and J.P. Morgan Securities LLC are the arrangers.

Supply fatigue

Investment-grade issuers priced more than $33 billion of bonds over the first four sessions of the week, compared to calls for about $20 billion to $25 billion of volume.

“While supply was well received by the market to begin the week, new issue performance is showing signs of fatigue at this point,” Yunyi Zhang, a BofA Merrill Lynch analyst, said in a report released on Friday.

The average new issue concession widened to 5.9 basis points on Thursday from 0.6 bps Monday through Wednesday, according to the note.

“Additionally, the recent new issues are trading 1.8 bps tighter on average from their pricing spreads, although some financial and utility names have drifted wider as a result of the heavy supply volumes,” Zhang said.

High-grade secondary market volume totaled $16.03 billion on Thursday, compared to $17.29 billion on Wednesday, $16.04 billion on Tuesday and $13.52 billion on Monday, according to Trace.

For the week ended Aug. 8, Lipper US Fund Flows reported inflows jumped to $2.8 billion for corporate investment-grade funds from $1.21 billion the previous week.

“Inflows to US funds and ETFs increased this past week for most fixed income asset classes as well as for equities,” BofA Merrill Lynch analyst Yuri Seliger said in a report released on Friday.

Inflows to fixed income rose to $4.43 billion from $2.36 billion, with flows weakening only for leveraged loans, high grade outside of short-term and global EM bonds, Seliger said.

Inflows to the high-grade category, which includes corporates, Treasuries, agencies and mortgages, rose to $2.41 billion this week from $2.23 billion in the prior week, with inflows to short-term high grade up to $1.92 billion from $800 million.

Outside of short term, inflows declined to $490 million from $1.43 billion last week, according to the report.

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