Despite Busy Week, Many New Issues Suffer Indigestion
Even though investors had plenty of cash ready to put to work, the sheer volume of new issuance and the lack of new issue concessions allowed for weakness in the secondary markets.
As we expected, last week was especially busy in the new issue market, with more than $40 billion of new issues priced. We are hearing from syndicate desks that this week should be busy as well: There could be another $30 billion of new issues primed to launch. While the current agreement in Washington, D.C., has resolved the tax increase issue and forestalled spending cuts under sequestration, it has addressed neither the fact that the United States has already reached its current debt ceiling, nor the longer-term issues of spending cuts and entitlement reform. CFOs thinking about issuing debt during the first quarter of this year would be well advised to tap the capital markets while the new issue window is open rather than risk trying to come to market after these issues return to the forefront. Once the next political battle heats up in earnest, access to the new issue market could quickly become impaired.
Even though investors had plenty of cash ready to put to work, the sheer volume of new issuance and the lack of new issue concessions led to a bout of indigestion in many of last week's deals. For example, Sunoco Logistics Partners' (SXL) (BBB) new issue struggled in the secondary markets. After pricing at +155, its new 10-year bonds ended the week almost 10 basis points wider, even wider than the +160 fair value estimate that David Schivell, our oil and gas credit analyst, assigned in his new issue note. Bank of America's (BAC) (BBB) new 10-year notes gave up much of their gains by the end of the week in the secondary market. Our bank credit analyst, Jim Leonard wrote that price talk for Bank of America's new issue was overvalued and preferred Morgan Stanley (MS) (BBB) or Citigroup (C) (A-) as better investments for their respective credit risk.
David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.