Dismal start to 2016 for US bond markets

By Will Caiger-Smith

NEW YORK, Jan 4 (IFR) - The US corporate bond markets started 2016 with a whimper on Monday, as a global sell-off kept would-be issuers on the sidelines and dashed hopes for a roaring start to the year.

At least six investment-grade companies decided to stand down on the year's first day of business, which typically sees a number of corporates start addressing their funding needs.

Grim economic data out of China renewed fears of a worldwide slowdown, hammering stock prices and foiling chances of the US$25bn-$30bn issuance week that had been expected.

"It (Other OTC: ITGL - news) 's horrible," one US syndicate head told IFR. "It's completely derailing anything we had planned."

It was a dismal start for 2016, which follows five consecutive years of record high-grade bond issuance, capped by the US$1.269trn tallied in 2015.

US stock indices lost more than 2%. On the credit side, the CDX IG25 was 2.86bp wider, while the CDX HY25 was 0.79 points lower around midday.

Some bankers were quick to say they were looking for a turnaround in sentiment on Tuesday, even as they revised January issuance forecasts down to US$100bn from an initial US$120bn.

But there was still concern that the divergence on rates after the Federal Reserve's hike last month could exacerbate the volatility that bedeviled the primary market late in 2015.

"With (Other OTC: WWTH - news) rate policy divergence globally, (and the) US projected to raise rates while other central banks implement more stimulus, credit markets could be more volatile," one said.

"Spreads could be under pressure."

FOREIGN AID

Foreign banks could come to the primary's rescue on Tuesday, with some heard to be scheduling investor calls for Monday night to reassess conditions once 2016's first day is in the books.

Latin American sovereign and quasi-sovereign names could also hit the market this week and provide a boost.

Bankers said state-owned oil companies Pemex and Ecopetrol as well as sovereigns Mexico, Colombia and Chile which wrapped up roadshows in December, were potential issuers.

But even regular Yankee issuers may have to pay up for funding, possibly needing to come with initial price thoughts some 20bp-25bp wider than outstanding spreads.

High (LSE: 0O9Y.L - news) -grade issuers paid an average new issue concession of 10bp in the third and fourth quarters of 2015, which was slightly higher than 8bp in the second, according to IFR data.

The scenario is no better in high-yield, where one banker said he knew of just five deals earmarked for this month, including a US$425m issue for Kraton Performance Polymers (NYSE: KRA - news) .

All eyes, he said, were on the loan financings for two buyouts: CVC Capital Partners and the Canada Pension Plan Investment Board's purchase of Petco, and AEA Investors' purchase of majority interest in contact lens retailer 1-800 Contacts.

The debt financing for both deals comprises a mix of high-yield bonds and leveraged loans, but the bond portions for both have already been privately placed, the banker said. Pricing details were not immediately available.

"The entire market will be looking at these two (loan) deals to see how much of concession will have to be added to get them over the goal line," he said. (Reporting by Will Caiger-Smith; Additional reporting by Hillary Flynn and Paul Kilby; Editing by Shankar Ramakrishnan and Marc Carnegie)