Summer Is Over for Corporate Bond Market; New Issue Window Wide Open
Credit spreads holding steady despite new issue supply.
Labor Day marks the unofficial end of summer for the corporate bond market as buy-side portfolio managers, sell-side traders, and investment bankers return from their vacations. Because of the seasonal slowdown in August, corporate bond issuers typically hold off on bringing new bond deals to market and wait for the market to spring back to life in September to price new transactions. Not only was this year no exception, but low Treasury rates and tight credit spreads helped propel the new issue market to near-record levels. For the issuers on which we provide credit coverage, more than $50 billion worth of bonds were priced last week. This is the single-highest weekly volume since the second week of September last year, when more than $65 billion was priced (although that included the $49 billion megadeal from Verizon).
Among the new issues, we thought Standard Chartered (STAN) (rating: A+, narrow moat), Lowe's (LOW) (rating: A, wide moat), and Frontier Communications (FTR) (rating: BB, narrow moat) were the most attractively priced. In our opinion, Standard Chartered's 5-year note has 15 basis points of upside potential. The new notes were priced at a spread of +75 basis points over Treasuries, while our fair value estimate for the spread is +60 basis points. For investors looking for longer-maturity bonds, Lowe's priced new10-year bonds at +82 basis points over Treasuries, which is cheap compared with our fair value estimate of +70. For investors with a higher risk tolerance, Frontier Communications issued new senior notes maturing in 2021 and 2025 that yield 6.25% and 6.875%, respectively. While we rate the company at below investment grade, we think investors are being more than adequately compensated for the credit risk. In our view, fair value for the notes is 6% and 6.50%, respectively. As such, we have placed the firm's notes on our high-yield Best Ideas list.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.