News on newly issued securities in the Americas 16 November 2020

Dan Barnes This is Primary Markets TV for the Americans – your updates on newly issued securities. I’m Dan Barnes. Coming up this week on the New York Stock Exchange, we’re expecting initial public offerings from Aspire real estate investors on Tuesday, the 17th. With Telos Corp. and Sotera Health expected to list on NASDAQ this Thursday, the 19th. If we look back at the biggest IPO in NYSE over the past 30 days and NASDAQ, I should say, as long as you’ve been in the health care technology sectors, which is perhaps not surprising given the continual global grip that COVID-19 housing markets. And of course, we saw a security firm, McAfee returns to the public sector, with a 730 million IPO on the 21st of October. In fixed income we’ve seen 4 trillion of US Treasury issuance in 2020 today, according to analysts. And we’ve seen a good supply of new investment grade bond issuance in Q3, following a very strong first half of the year. In October, we are up to a gross issuance of around 1.73 trillion dollars, which Morgan Stanley’s analysts put at about 65% up year-on-year. It should be noted that a lot of that cash will be sitting on balance sheets as a buffer liquidity, of course, for those firms, rather than being spent. And refinancing, of course, is also thought to still be a big driver of supply. Joining me now is Simon Maughan, Liquidnet’s head of trading alpha, Paul Faust, head of strategy and product development at BondCliQ. We’re going to talk through some of the trends that we’re seeing in primary markets. Guys, welcome to the show.

Simon Maughan Hello.

Paul Faust Good to be here, thanks, Dan.

Dan Barnes Simon, if I can start with you in the equity space; is the level of activity that we’re seeing at the moment commensurate with what you’d expect at this time of year and relative to previous months?

Simon Maughan As of November the 13th, we’ve had 370 IPOs year to date in US markets, and that’s 74% up on this time last year. And we are on track to be the strongest year since 2000, and subject to what happens in the rest of the year, potentially beat that record. So, that’s good and bad. Everybody remembers 2000 as the peak of the tech boom and I don’t think too many people are hoping that we repeat that. But there are definitely some echoes given what’s going on in markets right now.

Dan Barnes Well, it’s very interesting. And Paul, just on the volume and activity perspective; are things around about where you’re expect them to be, or higher or lower?

Paul Faust Going into November is always a bit of a slowdown into the Thanksgiving holidays, and it’s somewhat front-loaded in the beginning of the month. But we’re running and exepcting about 70 billion worth of issuance in November. In investment grade that’s probably about 50% of the run rate we’ve had this year. But 70 billion has been a good month. And historically, typically getting anything over 100 billion in any one given month is a big month for the US markets. And when you factor in high yield, we’ve been at a run rate of about 200 billion a month, excluding March, obviously. We’ve actually pushed the overall corporate index out by almost a year, because our average issuance is now 14 years vs an average of 10 years. There’s definitely some composition pieces to it as well with respect to the last couple of weeks, we’ve seen far more triple the issuance and we’ve seen a bit more of an increase in financials than we typically have.

Dan Barnes And Simon, just coming back on that point, about which sectors are actually issuing, I mentioned tech and health care over the last week. What’s your perspective on any sectoral trends we’ve seen in equities?

Simon Maughan Yes, for sure, it’s tech and biotech that have dominated and continues to be a feature of the upcoming pipeline, and there’s a couple of reasons for that. The first is, that in the tech space, we’ve seen great advances in recent years in modular technology and the rise of single issue companies, that have leveraged cloud computing and that can pull together packages and software very, very rapidly. And these are forming part of a new economy. And they are in a hurry to get in the marke, because they can build these businesses quickly, so why not. Secondly, in the biotech space, a similar type of thing is happening around the capacity of cloud computing, but if we think about all the advantages in gene and DNA technology, and the advent of AI and pattern recognition, there’s an awful lot of developments that have accelerated because of the advances in AI and cloud computing, and those type of names are looking to come to the market. But I would be remiss if I didn’t mention the big trend of the second half of the year, which of course is the ‘spac’ – the special acquisition company, and these are coming at a tremendous pace. And if we do reach that record 2000 issuance, that I talked about earlier, then it will largely be because of all these spacs lining up to get involved in who knows what, but most likely the tech and the biotech space.

Dan Barnes Absolutely, and I think it would be very hard for any investors to ever miss the spactrend, but could you just give us an overview of what a spac is, and therefore why it does have that sort of open-ended nature to it?

Simon Maughan The basic problem that spacs are solving is that the IPO market is bust. In the late 2020, if you have to pay 7, 8, 9% in fees to list on the equity markets, against a backdrop where we have about half as many listed companies as we did at the peak. Something has to give, otherwise the equity markets are going to shrink away to nothing. And the spac is one solution to that. We’ve seen other companies try things like direct listings, but the spac is an alternative means of companies listing, whereby a fund with deep pockets or investors with deep pockets list a vehicle, that doesn’t have any specific business purpose other than to make an acquisition. And investors invest into that stock, basically trusting the track record of the sponsor of that acquisition company. And those track records can be very varied. And typically you will back an investor when they are standing by to put more of their own money into the investment, so that you know that you will be investing alongside them and they will be fully committed. But that’s not always the case. So it’s definitely, ‘buyer beware’ when it comes to the spac space.

Dan Barnes Very much so. And Paul, obviously, we’ve seen now that issuers sort of perhaps struggling in the equity markets, as we just discussed. But in fixed income it’s an issuer’s market, right?

Paul Faust It’s hard to believe when you’ve got a sub 1% Treasury note that there is this type of demand. But until the end of October, we had 30 straight weeks of inflows into the market, so that’s basically post-COVID-19, and there’s a lot of reasons behind it. There’s been some rotation, obviously, with the equity market as high as it’s gotten, and there’s a natural movement or demand to rebalance portfolios and people have to add to fixed income on the other side. But as well, you’ve got the Fed in the backdrop. That’s a big piece of this. And when you’re looking at sub 3% money, it’s a good time for corporations to shore up their balance sheets. We did see, in addition to the issuance, you’ve actually seen a number of corporations buying back a lot of their shorter term debt as well. So they have been doing a lot of work in terms of adjusting their balance sheet and their liability makeup, so that’s been a big piece of it. You had Verizon and Bristol-Myers came this week with two very large tranches, I think the Verizon deal was in the top 10 in terms of size for the year. They’re are a little bit weaker with the market being a little bit weaker, but you had very small concessions. I think concessions were down to single digits for a multi-tranche, 12 billion dollar deal, in Verizon’s case. So, you know, to your point, it’s full steam ahead, which is why we’re seeing a 60% percent increase on an already fairly active year of 2029.

Dan Barnes Do both of you think that investor appetite is likely to be sustained? I mean, in fixed income, obviously, property markets are a great source of liquidity. These are not perpetual instruments. One does have to constantly find new bonds to fit into the portfolio that fit the right criteria. So Paul, I would guess that means that there’s still an appetite there, despite the very low rates.

Paul Faust Without question, it’s continued. And actually a lot of retail money has come into the market. The municipal market had its biggest issuance in October, and you’ve seen muni yields as a percentage of Treasury yields are now back below 100%, so that’s a fairly healthy sign for that market as well. It’s hard to say what gets in the way of it, but I don’t think anyone sees rates going much higher in the next year, so with that kind of a backdrop, it actually makes credit look somewhat cheap.

Simon Maughan Paul raised an excellent point there about the strength of these markets relative to each other. As we get a lot of equity issuance, then you want your 60-40 portfolio or whatever it is, it has to rebalance back towards fixed income. And then we get a lot of fixed income issuance. And that’s doing two things; it’s driving stock prices up when there’s no issuance, but it’s also creating the demand for this new issuance.

Dan Barnes Absolutely, guys, that’s been great. Thank you so much.

Paul Faust Great, thanks a lot.

Simon Maughan Pleasure.

Published on November 23, 2020