Corporate Bond Sales on Pause

Corporate bond sales are expected to resume in earnest next week after taking a breather since late December while voters in Georgia head to the polls to choose which party will control the U.S. Senate.

Investment-grade companies may borrow as much as $30 billion in the coming five trading days, and up to $100 billion in lighter-than-normal sales volume during the month, according to Bank of America Corp. credit strategists led by Hans Mikkelsen.

January’s issuance will be front-loaded with foreign borrowers tapping the U.S. high-grade market in the first couple of weeks as domestic firms enter voluntary earnings blackout periods, the analysts said in a report. T-Mobile US Inc., Walgreens Boots Alliance Inc., Conagra Brands Inc., and Micron Technology Inc. are among companies scheduled to report earnings next week.

“There could be some M&A [merger and acquisition]–related issuance in the pipeline, as well as a wildcard factor from the U.S. 5G license auction that‘s drawing bidders like AT&T, Charter, Comcast, T-Mobile, and Verizon, among others, and reaching much higher-than-expected valuations,” the analysts wrote.

Two runoff races in Georgia tomorrow will determine whether President-elect Joe Biden gains a slim majority in the Senate to advance his agenda in Congress, or whether Republicans maintain the ability to block major legislation. Market participants expect more fiscal stimulus, regulation, and higher taxes if Democrats win. The initial reaction would be positive, as stimulus would likely come first, JPMorgan Chase & Co. credit research analysts led by Stephen Dulake wrote in a note last week.

“One potential fly in the ointment could be a snap higher in underlying bond yields and interest rate volatility,” the analysts said.

Inviting Conditions in the Junk Market

The high-yield primary market is also expected to spring back into action next week, with one of the market’s top five dealers expecting more borrowers to return in the new year, as the “extremely attractive” conditions should continue at least into the first quarter.

Average January junk-bond issuance over the past six years has been in the range of $20 billion, with annual supply forecasts largely ranging from about $300 billion to $375 billion. That compares to an all-time high of $431.8 billion in 2020, according to data compiled by Bloomberg.

The leveraged-loan market is seeing a slow start to 2021, with only a few deals expected to launch this week and next week, though a few stragglers left over from last year may price. No bank meetings are scheduled for next week.

Wall Street credit strategists expect a decline in U.S. leveraged-loan sales in 2021, projecting a volume of $275 billion to $380 billion, after almost $334 billion of loans launched and $301.3 billion priced in 2020, as of December 17. However, this could change once the year gets started, given the attractive terms available to issuers now, upward trends in returns and a key price index, and expectations that collateralized loan obligation (CLO) issuance will rebound.

Finally, private credit will continue to see a flurry of activity persist into next week, as lenders sit on about $300 billion of cash, and private equity sponsors are encouraged to close tack-on acquisitions or secondary buyouts. The uptick in volume is expected to be driven by optimism surrounding Covid-19 vaccine rollouts and demand that had stored up following a standstill period earlier in the pandemic.

—With assistance from Lara Wieczezynski, Jeannine Amodeo, Kelsey Butler & Gowri Gurumurthy.

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