Investment Grade Weekly 03/09/2018

Fund Flows & Issuance: According to Wells Fargo, IG fund flows for the week of March 1-March 7 were a positive $577 million.  This is in contrast to Lipper data, where IG saw its second outflow YTD with an exodus of $740 million from IG funds.  HY outflows continue, and now there have been 8 consecutive weeks of HY outflows for Lipper reporters.  Over $16.6 billion has exited HY over that time period, the largest high-yield outflow streak on record.

The IG new issue calendar saw the most active week of the year, with much of the activity driven by CVS’s $40 billion issuance across 9 tranches.  The $40bn deal was the third largest corporate bond deal on record behind Anheuser-Busch InBev’s 2016 $46bn deal and Verizon’s 2013 $49bn deal.  Appetite was robust for the CVS issuance due to attractive concessions and plenty of portfolio capacity for the issuer –the bonds are currently 10-20 basis points tighter across the curve from where the deal priced.  The strong payroll data has brought a couple of IG issuers into the market as we go to print on Friday morning.  All-in total corporate issuance should end the week at nearly $50bln.  Corporate issuance is down 12% y/y but there are several large M&A related deals waiting in the wings that could narrow this gap substantially in the coming weeks.

The Bloomberg Barclays US IG Corporate Bond Index opened on Friday with an OAS of 100 on par with its YTD wide of 100.  The YTD tight on the index in 2018 was 85, the tightest level since 2007, when spreads bottomed at 82.  The all-time tight was 54 in March of 1997 and the all-time wide was 555 in December 2008.  2017 wide/tight was 122/93.

(Bloomberg) U.S. Added 313,000 Jobs in February; Wage Gains Cool to 2.6%

• Payrolls rose 313,000 in February, compared with the 205,000 median estimate in a survey of economists, and the two prior months were revised higher by 54,000, Labor Department figures showed Friday. The jobless rate held at 4.1 percent, the fifth straight month at that level. Average hourly earningsincreased 2.6 percent from a year earlier following a downwardly revised 2.8 percent gain.
• U.S. stock futures and bond yields rose, as the report signaled the labor market remains strong and will keep driving economic growth. The wage figures show a cooling from a pace that spurred financial turbulence last month on concern that the Federal Reserve could raise interest rates faster. While the unemployment rate remains well below Fed estimates of levels sustainable in the long run, the rise in participation suggests the presence of slack that would keep policy makers to a gradual pace of hikes.

 
(Bloomberg) CVS Builds $120b Book, Pays Palatable Concessions

• CVS Health Corp. paid about 18 basis points on average to price the $40 billion bond leg of its proposed acquisition of Aetna Inc. in the third largest U.S. dollar corporate debt offering ever. The company is said to have built orders surpassing $120 billion, or 3 times covered, at the guidance phase.
  • New issue concessions ranged from 10-25bps, levels agreeable to the issuer given the size and scope of this deal. Concessions included 25bps on the $9b 10-year and 15bps on the $8b 30-year. Many were looking for this trade to strengthen a credit market that’s softened in recent weeks.
  • Relative valuation is challenging for a trade of this size, given the high visibility and larger credit spread widening.
• Word that a deal was in the works started circulating around February 21 when the 10-year was trading around +120. Those bonds widened out to +135 by March 1, when the investor meetingswere disseminated to the market suggesting a deal was imminent.
• So where is the “pure trade” before the transaction is priced into the market? Sticking to a method of using trades prior to announcement gives us T+132 on the 10-year, suggesting that the new issue concession on the 10-year was 25bp.(Bloomberg) Blackstone’s Goodman Says High Yield Faces Needed Disruption

• “Rising rates is going to create volatility, particularly in the high-yield bond market,” Goodman, the co-head of Blackstone Group LP’s $132 billion GSO Capital Partners credit business, said in a Bloomberg Television interview in New York. “We need that dislocation — that disruption — to find new things to invest in.”
• Goodman said he expects the average spread on high-yield bonds, currently about 340 basis points over rates on comparable Treasuries, to widen to widen to 700 basis points in the next two to three years. Spreads haven’t been that wide since oil prices reached a bottom in early 2016.
• Distressed and mezzanine investors like GSO and rival Oaktree Capital Management have been patiently waiting for rates to rise, as a glut of yield-hungry investors have made slim pickings for credit firms. GSO has $25 billion of dry powder — money sitting on the sidelines, waiting for investment opportunities — while Oaktree has $20 billion, according to a recent filing.
• “As spreads widen you’re going to find lots of investors coming back in to that market,” Goodman said.