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Capital Markets

What Frequent Issuers Should Know

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September 07, 2017

Listen to the market but always keep it guessing a little bit.

Bond2According to data from Deutsche Bank, going to the debt market twice a year puts any corporate bond issuer into the upper 20th percentile in terms of frequency. This would make many of the frequent bond issuers in the NeuGroup’s Treasurers’ Group of Thirty Large Cap edition (T30LC) peer group, members of that lofty cohort.

During a recent meeting, members of the group reviewed a Deutsche Bank-provided list of important considerations members should ponder when issuing.

One suggestion was to listen to the market and be responsive, but not overly so. Investors want the biggest deals and tranches possible to bolster liquidity, members were told, as well as issuance predictability.

To that end:

  • Don’t be too predictable. Cadence of issuance is a major challenge and one key element is predictability. Corporates that issue debt suddenly and without warning will pay a premium and see volatility in their spreads, but overly regular issuers will likely prompt investors to lighten up on the paper before the deal, to push spreads wider. 
  • Size is also key. The investor ideal is a single, massive transaction a year offering large, liquid tranches, but that may not jive with needs of the issuer, which must consequently search out the minimum deal size that’s relevant to investors. 
One T30LC member raised the question about whether companies as a whole were changing their funding strategies. At the time of the meeting, the view – likely still true today – was that companies are moving to the shorter end of the yield curve and focusing on shorter tenors with the average maturity down the 2017. This is partly due to increased issuance by financial companies and to companies taking “wait and see” approach in terms of tax reform. But other borrowers have intentionally issued more long bonds because they anticipate longer-term debt to be grandfathered.

One member noted that his company had been to market several times over the last 18 months, each time for strategic reasons. Since November, however, the company has been quiet until it sees what happens with repatriation. “We’ll most likely be issuing outside the US to fund repatriation,” the member said, adding that as tax reform looks less likely to happen, the company is considering “buying some time” with a short-tenor deal.

A member from a major multinational noted the company’s captive finance arm typically issues several times annually, spreading them evenly throughout the year in deference to the blackout periods during the rest of the year. As a blackout period closes and depending on market conditions, it may mandate a bank or not. Or it may do daily calls for a week, take a few days off, and do daily calls again the next week, until it figures out how to mesh the market’s needs with its own. “We go into any … period knowing what we think the tenors will be, but we’re willing to change,” the member said. He added that the company used to frequently issue single-tenor tranches but more recently has issued multiple tranches, “and investors seem to like that a whole lot better.”

Frequent issuers, even those doing just two predictable deals annually, are engaging more in non-deal marketing to update investors on their stories, often on an ad hoc basis. For instance, a treasurer visiting New York may have the afternoon free and invite five or six investors out to lunch. Investors also are becoming increasingly comfortable with telephone marketing, and issuers who never would have manned the phones for a debt offering before are now calling investors on the day of the offering. Another observation is that treasury executives whose companies issue infrequently in Europe are increasingly heading there for visits with investors, who welcome the face time. European investors have become more comfortable with non-deal roadshows.

In the end, treasurers will have to keep a close eye on unfolding US tax reform; until something transpires, it's likely to continue to weigh on corporate issuance strategies. Also weighing on those strategies is the recent announcement that Federal Reserve Vice Chairman Stanley Fischer will make his exit in October. Experts say this upends the balance of powers between the Fed governors and regional Fed presidents, with the presidents getting more say. The Fed likely will continue with its plans to move ahead paring its balance sheet, which has grown to $4.5 trillion since the 2008 financial crisis. The uncertainty of market reaction and a likely rate hike in December will also have issuers on alert (and maybe more deeply entrenched on the sidelines).

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