Investment-Grade Market Holds Steady; High-Yield Sinks With Stocks
Federal Reserve holds off yet again on raising the fed funds rate.
A few brave issuers entered the market early last week, but the new issue market quickly faded as investors awaited the Federal Open Market Committee decision. Among the new issues, we think St Jude's (STJ) (rating: A, wide moat) bonds were attractively priced compared with our view of the credit risk, even though we recently downgraded our rating by two notches. The downgrade reflects the increase in debt leverage used to acquire ventricular assist device company Thoratec. Management intends to maintain a strong investment-grade rating, though, and aims to deleverage to gross debt/EBITDA of around 2.0 times by the end of 2017, or about 1.5 turns of deleveraging in the two years after the planned acquisition, by our estimates. The firm's new 10-year notes were priced at Treasuries plus 175, but we think fair value on the notes is +150.
The average spread of the Morningstar Corporate Bond Index tightened 1 basis point to +174 basis points over Treasuries. However, as stocks sank late in the week, contagion of the risk-off sentiment spread to the high-yield bond market, and the average credit spread of the Bank of America Merrill Lynch High Yield Master Index widened 18 basis points to end the week at +580.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.