United Technologies continues calls; supply weighs; credit spreads widen; bonds mixed

By Cristal Cody

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

United Technologies Corp. (Baa1/A-/) continued 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.

The Markit CDX North American Investment Grade 30 index eased more than 2 basis points on Friday to end at a spread of 62 bps.

In the secondary market, bank and financial paper traded mostly flat to softer over the day with paper from Mitsubishi UFJ Financial Group, Inc. about 2 bps to 4 bps wider, notes from Morgan Stanley flat to 1 bp softer and paper from JPMorgan Chase & Co. and Wells Fargo & Co. mostly unchanged, according to a market source.

Kroger Co.’s senior notes (Baa1/BBB/BBB-) have been mixed since Fitch Ratings downgraded the company by one notch on Tuesday, a source said.

Kroger’s 3.7% notes due 2027 eased about 1 bp to head out at 124 bps bid on Friday.

The notes were quoted on Tuesday at 126 bps bid.

The Cincinnati-based grocery retailer sold $600 million of the notes on July 17, 2017 at a Treasuries plus 140 bps spread.

Supply fatigue

Investment-grade issuers priced more than $33 billion of bonds during 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 U.S. 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 in the most recent 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 short-term, inflows declined to $490 million from $1.43 billion last week, according to the report.

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