As Pace of New Issuance Slows, Credit Spreads Should Begin to Recover
China cuts interest rates and ECB pledges to ramp up its stimulus programs.
Even including the $8 billion Alibaba (BABA) (rating: NR, wide moat) transaction, the pace and volume of new issues slowed last week from the prior two weeks. Although the pace slowed, it was still greater than the average weekly volume this year. As evidenced by widening credit spreads over the past few weeks, the new issue volume has eclipsed market demand. The average spread of the Morningstar Corporate Bond Index widened 2 basis points to +132 (its widest level this year), and in the high-yield market, the Bank of America Merrill Lynch High Yield Master II Index widened 11 basis points to +454.
Investor demand has been pressured from the top down, as global economic growth has generally shown signs of cooling, and from the bottom up, as shareholder activism has reduced the credit quality of a number of issuers over the past few months. Further damaging sentiment, the 7-year and 10-year tranches of Alibaba deal performed poorly in the secondary market. At the close Friday, the midmarket quotes for the 7- and 10-year bonds were 2 and 4 basis points wide of their new issue spreads. The order book for Alibaba bonds was reportedly 5 times the size of the deal, but the underwriters ended up pricing the bonds significantly tighter than price talk, and many large investors, especially insurance companies, dropped out.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.