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Companies Go All-In Before Rate Hike, Issue Record Debt In Q1

Tyler Durden's picture




 

It should come as no surprise that Q1 was a banner quarter for corporate debt issuance as struggling oil producers tapped HY markets to stay afloat, companies scrambled to max out the stock-buyback-via-balance-sheet re-leveraging play before a certain “diminutive” superwoman in the Eccles Building decides to do the unthinkable and actually hike rates, and there was M&A. As we discussed last week, rising stock prices have tipped investors’ asset allocation towards equities even as money continues to flow into bonds, meaning that yet more money must be funneled into fixed income for rebalancing purposes, which ironically drives demand for the very same debt that US corporates are using to fund the very same buy backs that are driving equity outperformance in the first place. Put more simply: the bubble machine is in hyperdrive.

Not only did Q1 mark a record quarter for issuance, March supply also hit a record at $143 billion, tying the total put up in May of 2008. Here’s more from BofAML:

1Q set records for both supply and trading volumes in high grade, as new issue supply volumes reached $348bn, up from the previous record of $310bn in 1Q- 2014, whereas trading volumes averaged 15.6bn per day, up from the previous record of $14.3bn during the same quarter last year…

 

Issuance in March totaled $143bn and it tied with May 2008 and September of 2013 for the highest monthly supply on record going back to at least 1998. September of 2013 was the month when the record $49bn VZ deal was priced…

 

Supply in March was supported by low interest rates (encouraging opportunistic issuance on the supply side and supporting investor demand by diminishing interest rate risk concerns) and a busy M&A-related calendar. Some of these trends will continue in April, although investors are becoming more concerned about the Fed hiking cycle…

Meanwhile, non-dealers are net short HY for the first time in at least two years:

Positioning for CDX HY turned negative for the first time since at least January 2013. Thus, CDX HY positioning fell to -$1.3bn, from $1.3bn in the prior week, marking a 2.6bn decline.

Speaking of HY, we’ve noted on a number of occasions that QE may have inadvertently contributed to disinflation over the past several months as artificially suppressed borrowing costs and the now 5-year old hunt for yield have conspired to allow otherwise insolvent oil producers to keep producing amid the supply glut. As a reminder, here’s what the picture looks like in terms of HY carrying spreads of 1,000bps or more versus last year (note the dramatic increase in energy-related issues):

And as UBS notes, QE has had a dramatic effect on HY issuance:

For HY, the picture is crystal clear: In both periods, issuance was $130bn more than average, or about 50% greater than the average amount expected, over an 11 month period…

 

The main drivers were lower yields, sharp drops in yields (we find that the speed of yield changes plays a significant role in impacting issuance), and strong inflows…

*  *  *

With deeply indebted shale producers beginning to run into trouble as writedowns loom, and with the debt issuance bonanza threatened by an impending rate hike cycle which UBS has shown is likely to push spreads wider, we would say yet again that stock price appreciation driven by balance sheet leverage will continue only until it can no longer continue. 

 

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Wed, 04/01/2015 - 18:45 | 5950501 knukles
knukles's picture

Are we talkin' about the rate hike this year, next year, the year after that or over The Bernak's dead body*?
                                   *(In his own words)

Wed, 04/01/2015 - 18:50 | 5950515 nope-1004
nope-1004's picture

"Soon", knukles, soon.

"Free beer tomorrow" signage that the Fed spews weekly.

Wed, 04/01/2015 - 19:06 | 5950566 nuubee
nuubee's picture

I'll gladly pay you in inflated tuesday dollars for happy hour today.

Wed, 04/01/2015 - 19:36 | 5950663 sun tzu
sun tzu's picture

10 to 1 odds that we see QE4 before we see the FFR hit 1% again if ever in our lifetime. We can trade Yellen for Kuroda and have the same results.

Wed, 04/01/2015 - 20:00 | 5950751 knukles
knukles's picture

We be seein' the world thru the same pair of glasses.

Wed, 04/01/2015 - 18:58 | 5950544 Herdee
Wed, 04/01/2015 - 19:01 | 5950549 ted41776
ted41776's picture

hahhahahahaha rate hike! hahahahaha you made a funny

Wed, 04/01/2015 - 19:29 | 5950631 malek
malek's picture

Yes, that April's fool joke was just a tad too obvious.

Wed, 04/01/2015 - 19:05 | 5950560 JenkinsLane
JenkinsLane's picture

FUBAR

Wed, 04/01/2015 - 20:02 | 5950761 hairball48
hairball48's picture

Rate hike? I might live to see it.

I hope so. Because I want to see what all these pointy headed economists do when the "rush to the exit" happens...and the bleating of the sheep as their pension funds evaporate.

yeeeehawww

Bring it on...still stackin'

hairball

Wed, 04/01/2015 - 20:54 | 5950875 Midnight Rider
Midnight Rider's picture

Record buybacks in Q1 yet the major indexes are still barely break-even YTD. Could these companies be the last of the greater fools?

Thu, 04/02/2015 - 12:39 | 5952542 Postkey
Postkey's picture

"1Q set records for both supply and trading volumes in high grade, as new issue supply volumes reached $348bn, . . . "

1Q set records for both demand and trading volumes in high grade, as new issue supply volumes reached $348bn, . . . 


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