A steady stream of deals in June helped cement the first half of the year as the busiest for the high-grade primary market since borrowing costs scraped all-time lows during the Covid pandemic. And, after a holiday-shortened first week and tepid start to July, issuance popped on Monday, July 8 with $13.5 billion of new supply hitting the market, including a $5 billion refinancing play by Broadcom post its acquisition of VMware.
June’s $97 billion surpassed volume for the same period for the past two years ($89 billion in 2023 and $69 billion in 2022), and it also reached the high end of syndicate projections for $85-100 billion. Issuance for the first half ($840 billion) surged past first-half totals of $688 billion last year, $708 billion in 2022, and $775 billion in 2021, the latter amount priced at some of the cheapest funding levels ever recorded. The only higher first-half total was in 2020, as issuers bridged cash-flow disruptions from the pandemic with an unprecedented $1.14 trillion of new paper.
With summer months comes the chatter of summer slowdowns. This year, market participants expect the pace to remain slower for longer, after many issuers brought forward their funding efforts to the first half, sensing storm clouds on the horizon from an array of factors, including US elections, global conflicts, monetary policy uncertainty, and churning electoral shifts in Europe. Strategists at BofA Global Research expect supply to downshift to $75-85 billion in July, which stands slightly below LCD’s 2022 and 2023 totals of roughly $87 billion apiece. They further expect volumes to taper over the back half of the year, including via lower amounts of bank-sector issuance year to year.
June issuance was helped along by a healthy pace of M&A activity. Proceeds from bonds earmarked to fund acquisitions accounted for roughly 19% percent of total supply, or $18.1 billion, including a $10 billion print in nine parts for Home Depot. M&A volume increased 22% year-over-year in the first half, to $125.7 billion, despite the lack of a blockbuster print on the order of last year’s $31 billion M&A placement for Pfizer. This year’s largest single deal remains AbbVie’s $15 billion M&A print in February.
Home Depot is expected to use proceeds from its curve-spanning offering to fund the repayment of commercial paper that was used (together with cash on hand) to finance its $18.25 billion acquisition of SRS Distribution. Meanwhile, Energy Transfer LP printed $3.5 billion of senior notes last month, along with a 2054 hybrid junior subordinated issue (which is discounted from LCD’s bond issuance totals under criteria that exclude hybrid issues), to fund its $3.25 billion purchase of WTG Midstream Holdings. Insurance concern Health Care Service sold $2.5 billion of new bonds to back its acquisition of certain assets from Cigna Group (NYSE: CI). Becton Dickinson and Royalty Pharma Plc placed smaller deals to fund M&A plays.
Refinancing accounted for roughly 35% of total issuance in June, or $33.8 billion. At least five issuers last month also ran concurrent tender offers, which were funded by proceeds from new bonds. Borrowers — including Takeda Pharmaceuticals ($3 billion), Vodafone ($3 billion), and Imperial Brands ($2 billion), among others — sought to take advantage of constructive market conditions to clear deals due in 2024/2025 and beyond.
Funding conditions remained favorable for borrowers as the second quarter ended. The average clearing yield for new offerings in June fell to 5.52%, from 5.65% in May and 5.74% in April, and versus a 2023 peak of 6.43% in October.
While demand metrics favored borrowers for much of the quarter, participants noted signs of sated accounts as June drew to a close. New-issue single-A paper widened slightly to T+93 at pricing in June, from T+87 in May, moving back in line with spreads recorded in the first quarter. New triple-B issues were printed on average at T+124, up from T+113 in May, while holding firm versus a T+130 average YTD, and a T+180 average for the first half last year, according to LCD.
Issuers continue to pursue longer-dated funding terms as costs subside from last year’s heights. Roughly 45% of new tranches (by count) printed this year mature in 10 years or more, which is up from 34-37% in the third and fourth quarters last year, and up from annual averages of 42-43% over the last two years. In 2021, when costs were at record lows, such long-dated paper accounted for 48% of all supply in the third quarter that year, and 50% of all tranches in the fourth quarter,
For investors, the wait continues for the performance jolt expected to come with the Fed’s eventual pivot to rate cuts. Investment-grade index returns were positive in June at 0.58%, though that wasn’t enough to lift the YTD return (negative 0.04%) into the black. On a rolling 12-month basis — which includes strong late-year gains in 2023 sparked by the Fed’s dovish November policy statement — returns improved to positive 4.95%, from 4.61% through May.
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