How a recovery will hurt newly issued investment grade debt

Published on 18 January 2021

Erin Lyons, co-head of US investment grade research at CreditSights tells us where the risks lie for new bond issuance, how investor appetite influences that and why share buy-backs might drive additional debt into the market.

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Dan Barnes Welcome to Primary Markets TV – this is the 18th of January and I’m Dan Barnes. We’re going to be looking at some of the big topics affecting new issues, specifically in the fixed income sector and this week, joining me is Erin Lyons, co-head of US investment grade research at CreditSights. Erin, welcome back to the show.

Erin Lyons Thanks, Dan. Thanks for having me.

Dan Barnes Whereabouts do you think levels are going to be for new issuance going to the start of this year and perhaps then over the full 12 months?

Erin Lyons So we published our outlook on the US IG market in early December and I was happy to see that our starting year spread prediction played out. We’re in a really tough situation right now where spreads are incredibly tight and investors are struggling to find value. I do think in the primary and the secondary, you’re going to see continued demand in the near term. There’s a lot of optimism right now. There’s a lot of money that needs to be put to work. And investors are trying to find the best way to do that. However, as we work our way through the year, our thesis is that things get better and we do get back to normal. And if that does occur, I think IG is going to struggle because it just doesn’t pay very much. You’re not going to be paid to play it safe and investors will look to take more risk. And I think that’s where we’ll see some widening in the back half of the year.

Dan Barnes Last week Eric Vanraes of Banque Eric Sturdza suggested, of course, there would be some upside for EM because of higher yields, but what’s your take on post-Brexit, post-US election, whereabouts might bond issuance be taking place?

Erin Lyons So we have a lot of revise to still address. We’re starting the year count with about 500 billion of debt that matures this year that we expect IG issuers will reify. Normally at this point in the year that worried about 800 billion. So a lot of it was addressed last year. We think M&A is going to be a big theme. And something else on our radar is shareholder returns. We could see an uptick in special dividends and then also increase share repurchases. We have seen a lot of share repurchase programs turned off during COVID-19, and we’re already starting to see it with the banks announcing, with earnings coming out this week that those repurchase programs are going to kick in and start happening. The question for supply is always, are they going to use debt to fund it? Good question, right? There’s still a lot of cash on balance sheets.

Dan Barnes Do you think that investors actually still have appetite for fixed income gains this year, given there were concerns about credit, which means that those high yields do carry potentially more risk?

Erin Lyons There is certainly still appetite. I think investors are all looking at the yields and just trying to figure out where they go and how they earn as much as they can. So they’re trying to be wiser, I think, about what they’re buying and they’re actually taking more risk in terms of what I’m seeing, because they need to increase that yield number, so we’ve seen the high quality buyers step into to more into the BBB space. We’re seeing the BBB and IG buyers do the crossover trade into BB’s. And we’re seeing everyone try to find the best opportunities to get paid right now.

Dan Barnes Erin, that’s been fantastic. Thank you so much.

Erin Lyons Thanks, Dan.