Issuance had been muted anyway this week, with $4.6bn of investment grade new issues. That was more than the $2.6bn issued the previous week, but made this the slowest fortnight of 2014.
Corporate earnings blackouts are the main reason for issuers’ absence, but companies also wanted to avoid coming to the market in a week when Federal Reserve chair Janet Yellen gave her semi-annual testimony to Congress.
In the event, it was the written word rather than the spoken which rattled stockmarkets. The Fed’s Monetary Policy Report, published on Tuesday to coincide with Yellen’s testimony, raised concerns that “valuation metrics” in some sectors “particularly those for smaller firms in the social media and biotechnology industries” were “substantially stretched”.
However, credit markets shrugged off the report and Yellen’s testimony, which underlined her cautious stance on the US economic recovery and the prospects of raising interest rates.
The Fed’s report gave the investment grade credit market a clean bill of health, but warned about other products and the perils of investors hunting for yield.
“Prices for real estate, equities, and corporate debt have risen and valuation measures have increased, but valuations remain roughly in line with historical norms,” the report said. “Signs of excesses that could lead to higher future defaults and losses have emerged in some sectors, including for speculative grade corporate bonds and leveraged loans.”
Bed, Bath and bonds
Investment grade firms that braved this week’s conditions were well received, supporting bankers’ consistent view that investors still want to put cash to work in credit.
Debut issuer Bed, Bath & Beyond picked a good week to grab investors’ attention with its $1.5bn of 10, 20 and 30 year notes.
Standard & Poor’s has just upgraded the retailer to A-, and it is rated Baa1 by Moody’s. Nevertheless, it offered a generous spread to get the deal done.
The deal was intended to fund a $1.1bn accelerated share repurchase after a 25% drop in its share price in 2014 that put it among the worst five performers in the S&P 500.
Bookrunners JP Morgan, Morgan Stanley and Wells Fargo set initial price thoughts at 140bp, 175bp and 200bp over Treasuries. A bulging orderbook that peaked at $10.5bn created strong pricing leverage.
The company sold $300m of 3.74% 10 year notes at 120bp over, $300m of 4.9% 20 years at 155bp and $900m of 5.1% 30 years at 180bp.
“The average 10 year coupon for a retailer is in the 3.58% range, so they’ve paid quite a premium,” said a banker.
On Tuesday, Toyota Motor Corp, rated Aa3/AA- , printed a $1.25bn five year bond at 50bp over Treasuries via Bank of America Merrill Lynch, Barclays and RBC Capital Markets.
Meanwhile, railway company CSX Corp (Baa2/BBB+) emerged from earnings blackout on Wednesday with a $1bn 10 and 30 year offering.
After beginning with price thoughts in the high 90bp area and 130bp area, levels were tightened by 10bp on each tranche.
Citigroup, Credit Suisse, Morgan Stanley and UBS priced $550m of 3.4% 10 year notes at 88bp over Treasuries and $450m of 4.5% 30 years at 120bp.
Proceeds were used to repay CSX’s 8.375% secured equipment notes that mature in October, and for general corporate purposes.