News on newly issued securities in Americas, 7 December 2020

Dan Barnes This is Primary Markets TV  Americas – your update on newly issued securities and upcoming IPOs. I am Dan Barnes. Two of the big, expected IPOs this week are, of course, Airbnb, which is listing on Nasdaq. Airbnb, of course, offers people the ability to rent out their homes, also indeed rent a home from somebody else as a way of traveling, or staying in a certain part of the country, or indeed abroad. We also have DoorDash, which is going to be issuing an IPO on NYSE as expected this week, both of those are coming in at around 2.8 billion dollars, according to reports so far. DoorDash is, of course, the online logistics expert firm. Now we’re going to be talking about the fixed income markets. We’ve seen enormous amounts of issuance of bonds this year. And we’re talking to Erin Lyons, who is the co-head of US investment grade research and US credit strategist at CreditSights. Erin, welcome to the show.

Erin Lyons Thanks and thanks for having me.

Dan Barnes To start with, could you tell us what the outlook is like for bond issuance for the end of the year?

Erin Lyons That’s a good question, and it’s something that certainly has surprised many of us strategists out there through this year. I expect things to remain a little bit active over the next two weeks, maybe weeks similar to what we’ve been seeing, so about 15-20 billion in the US IG space, and then shut down for Christmas. I think everyone agrees, we’re ready for a break and want this year to be over.

Dan Barnes Yes. So in terms of the issuance we’ve seen, do you have an expectation of the issuer appetite going forward? Because there’s been a change, obviously, in government policy in terms of bond buying, but rates are still very low.

Erin Lyons Right, and that’s a good question. And I think it’s something that investors have really attached to the notion that the Fed’s support has been there and a positive signal for the market. But in actuality, the Fed didn’t do much other than communicate really, really well. The total purchases were only about 15 billion and about 8 billion of corporate bonds. It didn’t really make that big of a difference in the scheme in the market. I think what issuers now have to grapple with is how do they balance higher leverage, because we’ve seen the EBA debt that fall away, and how do they balance that with just really record low rates and funding costs? It does seem like the right time to be adding debt, but they also have to be very cautious about what happens to their leverage. And how the rating agencies, I think in particular, react to these elevated levels.

Dan Barnes We also have the impression that a lot of the issuance was really building up cash buffers to protect firms against the tribulations of the the oil trade war that we saw back in March. Of course, COVID-19 and various other factors, too. Some of those have gone away or potentially will go away at the start of the year, so is that changing issuer appetite, you think?

Erin Lyons I think there is this notion that they want to build cash buffers, and that makes sense, and I think that’s why you’ve seen investors so willing to lend. It seems like it’s going to a good cause. But what I think is the bigger worry for investors in the second half of 2021 in particular, is just what they do with this cash. When we come back to normal, they don’t need to have massive piles of cash, and I do think that’s the point where shareholders are going to look for some sort of returns. What we’re discussing in our outlooks this year is, are we going to see more special dividends? Are we going to see ramped up share repurchase programs? We don’t think we’ll see just outright dividend increases, but I do expect some of that cash to go back to equity holders rather than to the fixed income investors.

Dan Barnes And of course, investors themselves, they’re not looking at great returns from fixed income or from just cash bonds at the moment. What do you think investor appetite is going to be like towards the end of the year and going into 2021?

Erin Lyons So I think 2020 is going to remain quite strong. And what we’re seeing is investors are looking to get ahead of that normal rush that we see at the start of the year. Think of the past five years in particular. If you’ve waited too long to invest, you’ve missed out. And then there’s kind of not a lot of options for you to buy. Also, if we’re looking at a lower supply outlook, and we had numbers in 2020, its just kind of exacerbating that need to buy now and sit. So, I think this trend is going to continue in US investment grade, at least until we have a widespread vaccine. In my mind, I’m splitting 2021 into two halves, and it’s really; ‘COVID-lockdown, let’s get through that. Build your cash buffers.’ And then the second half is more of a back to normal. ‘Why am I sitting in a portfolio that’s yielding 1.8% in US IG? I need to take more risk.’ So, that’s kind of how I think investors are thinking about next year. The end of this year it’s certainly going to be a rush to buy. We’ve seen the IG index tighten considerably in the past week, and we’re only 6 basis points off of the starting year levels and the BofAML Index at this point. So, who would have thought it?

Dan Barnes Absolutely. The week before last, we heard from Invesco saying that they thought people might be looking to move out of US fixed income and potentially moving into emerging markets, fixed income. Do you have any expectations for investor appetite to change in that direction?

Erin Lyons I do. And I guess I don’t have such a firm view on where they go. But I do think US IG is going to not be the first choice as it has been. It really has been a safe haven. We’ve heard that it’s definitely become almost a Treasury substitute for those high quality issuers. I think investors are just going to look to get paid more. The other thing on my concern list is the duration. And you’ve really seen duration extend in the IG space. And if you’re worried at all about rates rising, that’s a really bad hit to your total return. So that’s another one of my focus areas for the next year.

Dan Barnes Overall, how do you think central bank policy is going to be impacting both issuers and investors going into 2021 and for the next 12 months?

Erin Lyons Our view is that the Fed keeps rates pegged in the front end. They’re going to be low. And then what we’re more worried about is that back end that tends to be driven by market demands. I also think the same rationale holds for Treasuries. Do you need to be buying? That’s a really safe haven. If things are improving in your economic numbers or, you know, poised to really skyrocket in the second half of the year. So, I do think that back end of the curve is in question. What we need to figure out is do we start to see the yield curve control and what that may do to that aspect? I think issuers will continue to take advantage of these very low rates, and it’s just so incredibly cheap. Right now we’re seeing over 200 basis points differential between the par-weighted coupon on the index and the yield. So as people refund, they’re just saving money, or they could borrow more and have the same carry costs. So, I think issuers will continue to take advantage, but what we may see actually is more issuance further out the curve in an effort to lock in those rates for longer.

Dan Barnes That’s fantastic. Erin, thanks so much for coming on the show.

Erin Lyons Thanks for having me.

Published on December 7, 2020