High-grade turns off after AB InBev's splash

By Will Caiger-Smith and Hillary Flynn

NEW YORK, Jan 21 (IFR) - The US high-grade market was eerily quiet this week as market volatility ate into any enthusiasm generated by AB InBev's record-setting US$46bn jumbo deal in the previous week.

The expected rush of supply from US bank heavyweights such as JP Morgan and Bank of America (Swiss: BAC.SW - news) simply did not happen, and just two high-grade issuers - one a Yankee bank - came to market.

Borrowers stayed on the sidelines instead, spooked by a blowout in credit spreads, a freefall in stock indices and a collapse in oil prices to under US$30 a barrel.

They were also turned off by the poor performance of new issues, particularly AB InBev's seven-trancher, which had been expected to set a positive tone for this week's proceedings.

But four of the seven pieces in the trade - the second-largest bond ever - are languishing up to 15bp wider than reoffer.

The only senior deal sold by a US bank this year, a US$2bn 10-year for Citigroup (NYSE: C - news) more than two weeks ago, has fared even worse, being spotted on Thursday 30bp wide of reoffer.

"The biggest damage the market has sustained ... is the AB InBev deal," said a syndicate head of a bank that did not act as a bookrunner on the trade.

He argued that the deal, which paid new issue concessions between negative 5bp and plus 20bp, was priced too expensively and that, because it has not been rallying in secondary, conditions have become tougher for other issuers.

That means borrowers are steering clear for now, not wanting to pay too much of a new issue premium for fear it could set an unwelcome and expensive precedent.

This week's two trades - a US$1.25bn issue from Lloyds and a US$1bn deal from Transcontinental Pipelines - both saw solid demand, but both paid high new issue concessions.

Lloyds Bank (A1/A/A+) paid 7bp-17bp in concession for its two-part deal on Tuesday while Transcontinental (Other OTC: TCLCF - news) (Baa2/BBB-/BBB), coughed up an eye-watering premium of 192bp - something not seen in the US high-grade bond market in years.

Lloyds was bid around reoffer on Thursday while Transco's 10-year notes were bid at US$101.74 versus their US$99.825 pricing.

ONLY TEMPORARY

Despite this week's hiccup, many bankers see the pause in supply as a temporary event, with business as usual expected to resume soon.

The feeling is that a few days of stability will bring back the issuance rush, as the major concern seems to be more than liquidity.

"When you have periods of volatility like this, if they are right at the start of the year, human psychology will start talking about the death knell for the whole year," one head of syndicate told IFR.

"People need to be adults ... This is a temporary bout of market decline."

Expectations are that top US banks, which have just emerged from earnings blackouts, have maturities in the first-quarter as well as extra issuance needed to meet Total Loss Absorbing Capacity (TLAC) requirements, would lead the charge.

That should help reinvigorate the primary market for domestic bank debt sold to institutional investors, which has seen just the lone US$2bn Citigroup deal so far this year - 84% down on the same period a year ago, according to IFR data.

Fears of an oversupply of bank paper and the impact of energy exposures on their balance sheets has pushed spreads on 10-year senior bank debt 42bp wider year-to-date, twice as much as comparable corporate debt, Barclays (LSE: BARC.L - news) analysts said.

However, they argued that energy exposure fears were overdone and that TLAC supply may be lower than expected, partly because of uncertainty around what debt qualifies as TLAC. (Reporting by Will Caiger-Smith and Hillary Flynn; Additional reporting by Michael Gambale and Anthony Rodriguez; Editing by Shankar Ramakrishnan and Marc Carnegie)