Why high-grade issuers stayed away from capital markets



High-grade issuers stayed away from capital markets

Despite favorable market conditions, high-grade corporate bond (AGG) issuance was muted in the week ending August 15. Issuance volumes dropped by 33% over the prior week. A total of $16.7 billion was issued over 17 transactions in the corporate investment-grade bond (LQD) market in the week ending August 15.

Issuance usually has a seasonal slowdown in July and August. There had also been a surge in primary market issues the previous week. More corporate borrowers came out of the earnings blackout periods. Issuance spiked to ~$25 billion in the week ending August 8.

Part 2

UBS offering dominates weekly issuance

Most issuers took to the capital markets to pay off older and costlier debt. Issuers also took to capital markets for general corporate purposes. The largest offering among them was UBS’s (UBS) $4.5 billion capital enhancement issue. It accounted for over 25% of the weekly issuance.

Issuance by type

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Floating rate note issuance accounted for ~10% of the issuance. The balance was issued on a fixed-rate basis. Four issuers hit the market with floating rate notes for a total of $1.6 billion. With interest rates expected to increase sometime in 2015, most borrowers want to lock in interest rates by going for fixed-rate issues.

Issuance by maturity and quality

A-rated borrowers were the most common. They accounted for ~51% of total issuance in the week ending August 15. Five-year maturities were the most popular. They accounted for ~38% of the total issuance.

What are investment-grade bonds?

Investment-grade bonds (BND) are rated BBB- and above according to Standard & Poor’s ratings system. Higher ratings imply lower credit or default risk. Lower ratings imply the opposite. Since investment-grade bonds are found to have lower credit risk compared to high-yield bonds, the rates of interest that borrowers pay are also lower.

The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) invests primarily in investment-grade bonds issued by U.S. corporate borrowers. LQD has holdings in large cap companies like Goldman Sachs and Verizon Communications. Both companies are also part of the S&P 500 Index (IVV). The iShares Core Total U.S. Bond Market ETF (AGG) primarily invests in investment-grade bonds issued by corporates and the U.S. Treasury.

Primary and secondary market activity

In the next section, we’ll analyze issuance by sector. We’ll also discuss the week’s major issues.


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