US IG/HY WRAP-Huge supply takes its toll on US high-grade market

By Natalie Harrison and Davide Scigliuzzo

NEW YORK, June 1 (IFR) - After months of an incessant flow of primary deals, fatigue is finally showing up in the US high-grade market.

Nine high-grade companies including Starbucks (Swiss: SBUX.SW - news) and Marathon Oil were set to raise just over US$10.5bn on Monday, but some clearly struggled to ratchet in pricing and ended up pricing deals with inflated new issue concessions.

Barclays (LSE: BARC.L - news) and Precision Castparts Corp (NYSE: PCP - news) paid double-digit new issue concessions on their respective US$1bn and US$2bn trades, while Estee Lauder widened price guidance by 10bp from the initial price thoughts stage.

"We are still getting sizeable trades done but we are not seeing enough pricing leverage as before," said one banker.

"After buying into the rush of deals earlier, investors now have more manageable cash positions so they are not chasing every deal tighter."

May's US$157bn of supply is the busiest for any month on record, and the year's tally is now around US$635bn.

This flood of paper has begun to weigh on spreads, reflected in a 5bp widening in average high-grade bond spreads over the 10 days up to last Friday to 138bp over Treasuries, according to the Bank of America Merrill Lynch Master Index.

Average high-yield bond spreads have widened 3bp to 458bp in that period.

Rate volatility has also made deal execution tougher. Yields on 30-year Treasuries jumped 9bp to around 2.96% on Monday after data showed US manufacturing activity rebounded in May.

Though this has led to price sensitivity, issuers are still being able to raise sizeable volumes through debt issuance.

On Monday, Brazilian oil company Petrobras managed to sell a rare Century bond (Kuala Lumpur: 7171.KL - news) despite a wide-ranging corruption scandal.

Petrobras raised US$2.5bn from the 100-year issue - its first international debt foray in over a year.

After what was heard to be strong demand of well over US$10bn, Petrobras brought in pricing to launch the deal at a yield of 8.45% - well inside initial price talk of 8.85% area and at the tight end of guidance of 8.55% (plus/minus 10bp).

At launch, the deal looked to offer a pick-up of around 110bp over the issuer's 30-year bonds.

More issuers are expected to brave the market tomorrow, while further ahead, Intel (Swiss: INTC.SW - news) is expected to launch a jumbo issue after the chipmaker said it would finance at least part of its US$16.7bn acquisition of Altera (NasdaqGS: ALTR - news) with new debt as well as cash.

Analysts at CreditSights expect Intel, rated A1/A+, to issue as much as US$12bn in bonds to finance the deal as the company would have to pay tax on any cash it repatriates from overseas to help pay for the deal.

"Intel has about US$14bn of cash and short-term investments on its balance sheet, (but) only about US$3bn of this is held in the US," CreditSights analyst Erin Lyons said.

ALTICE TRADES UP IN HIGH-YIELD

The US high-yield market got off to a slower start for June, with only a US$300m 8-year non-call three senior issue for Global Partners expected to price on Monday.

Software (Xetra: 330400 - news) company Informatica (Caa2/CCC+) has downsized its planned eight-year non-call three senior unsecured bond to US$650m from the initially targeted US$750m, after tweaking the structure of its LBO financing package.

At the same time, however, strong demand from investors allowed the company to tighten pricing significantly, setting price talk of 7.25% on Monday after sounding out investors with whispers of low 8% last week.

The recent US$1.72bn three-tranche issue from cable firm Altice was also trading up in secondary. The US$1.1bn Opco secured tranche was bid at 101, having priced at par on Friday, while the US$300m holdco was up at 101.25 from par pricing and the US$320m super holdco at 99.75 from its 98.275 launch price.

"The opco secured was a blowout," said one banking source.

"The other two tranches came a bit wide of whispers as investors didn't buy into Altice's story that it could bring in margins as much as it said it could."

The bond financed Altice's US$9.1bn acquisition of Suddenlink Communications. (Reporting by Natalie Harrison and Davide Scigliuzzo; Additional reporting by Paul Kilby; Editing by Shankar Ramakrishnan)