U.S. CREDIT WEEK AHEAD: Issuers to Navigate Rout Amid Rate Angst

(Bloomberg) — As credit markets keep showing signs of stress, borrowers will probably continue looking for windows of stability to issue new debt next week while investors remain picky.

Wall Street syndicate desks are projecting about $20 billion in fresh investment-grade debt. Three issuers that opted against moving forward with deals on Thursday will have another look next week as companies navigate bouts of volatility, wrote Bloomberg News’ Michael Gambale.

The selloff in bonds and related derivatives so far this year has been swift and large — in the top 10% of the past decade — and risk premiums are likely to drift wider in the coming weeks as monetary-policy uncertainty remains elevated, according to Barclays Plc. Credit-market volatility accelerated Thursday after poorly received earnings reports unnerved investors, before peaking on Friday as a stronger-than-expected U.S. payrolls report bolstered the case for the Federal Reserve to raise rates.

“Patience is likely warranted, as credit performance tends to be mixed in the weeks after moves of this magnitude, and spreads could drift wider given Fed risk and rich starting levels,” Barclays strategists led by Bradley Rogoff and Dominique Toublan wrote in a note Friday.

Front-Running the Fed

High-yield borrowers in a hurry to get ahead of the rate-hike cycle will likely take advantage of calmer days next week to sell more debt. AMC Entertainment Holdings Inc. sold a $950 million junk bond after almost doubling the size of the offering amid unexpectedly strong demand at a moment when investors have favored floating-rate loans over bonds.

The strong demand for the AMC deal bucked a powerful trend in U.S. leveraged-finance markets, where the anticipation of Fed tightening has tipped investors’ preference toward the floating rates of leveraged loans and away from fixed-rate high-yield bonds.

Read more in this week’s Credit Brief: Scrambling to Sell; Weinstein Says Buy CDS

In leveraged loans, at least 17 deals are due next week, including Hunter Douglas’ leveraged buyout financing with a $3.1 billion dollar-denominated tranche. Other big acquisition and LBO deals due next week include Amentum’s $1.29 billion deal and Ufinet’s $1.14 billion transaction. There are also three loan meetings set for Monday.

Red-Hot Inflation

Big borrowers, including Coca-Cola Co., PepsiCo Inc., Pfizer Inc. and Walt Disney Co., are expected to report earnings and become candidates to sell bonds. Among banks reporting, embattled Credit Suisse Group AG will be closely watched as it tries to move past a series of scandals, including the recent replacement of Chairman Antonio Horta-Osorio after he breached quarantine rules.

After the latest batch of data showed a red-hot labor market, and signs are emerging that the worst of the fallout from omicron has already passed, a 50 basis-point hike is likely to receive serious consideration when Fed officials meet in March, according to Bloomberg Economics. January consumer-price index figures may still show inflation climbing to 7.3% year-over-year, bolstered by food and energy, they added.

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