Outlook 2016: Dire 4Q drags down 2015 issuance; players project vigorous primary in 2016

By Paul A. Harris

Portland, Ore., Dec. 31 – The 2015 primary market, pressured by distress in the energy sector and a rate hike that loomed during the second half of the year, still managed to put up the fourth all-time biggest yearly issuance total in terms of dollar amount: $263 billion in 415 junk-rated, dollar-denominated tranches to the Dec. 18 close.

The tally fell 18% short of 2014's $314 billion in 586 tranches.

And it lagged the biggest-ever yearly total, 2012's $325 billion in 674 tranches, by 21%.

In spite of beginning in the dust cloud of the crude oil price crash that took hold in late 2014, the past year got underway at a pace nearly identical to that of the 2012 record year: $90 billion of issuance to the end of the first quarter.

Even at the halfway point, 2015 issuance ran neck and neck with the 2012 half-year total of $184 billion.

However by the end of the third quarter 2015 had put up $226 billion, 4% shy of the $235 billion seen by the end of the 2012 third quarter.

As the fourth quarter got underway the above-mentioned pressure from the energy sector, with a 15.3% weighting in the BofA Merrill Lynch High Yield index, had the junk bond market by the neck in a two-handed choke-hold.

The California Resources Corp. 6% senior notes due Nov. 15, 2024, which priced at par on Sept. 11, 2014 in a $2.25 billion tranche and served as a benchmark for the fortunes of the energy sector throughout the past year – mirroring the price of crude oil, traders said – was as low as 59 bid in early October, and was 43½ bid, 44½ offered on Dec. 10, traders said.

The other hand in that two-handed choke-hold, of course, was extended by the Federal Reserve Bank, which threatened a rate hike late in the third quarter. And although rumored plans for a September hike were withdrawn, the threat loomed into the late-year period before the increase ultimately materialized on Dec. 16.

With just $37 billion of issuance, 2015's fourth quarter trailed 2012's $93 billion fourth quarter by a jaw-dropping $59 billion, or 86%.

Against a backdrop of hedge fund liquidations and massive cash outflows heading into year-end, the primary market was ending 2015 with a whimper.

Issuance steady to lower

Forecasts from the underwriters for 2016 range significantly, but generally tend to see 2016 issuance coming in at the same pace or lower than that of 2015.

Nevertheless, on a historical basis the forecasts call for a vigorous 2016 in the new issue market.

Morgan Stanley expects $296 billion in dollar-denominated issuance.

Barclays looks for $270 billion to $290 billion in U.S. high-yield issuance in 2016.

JPMorgan is forecasting issuance of $275 billion.

Credit Agricole expects $240 billion of issuance in 2016, a lot of it driven by mergers and acquisitions financing, according to a syndicate source there.

SunTrust Robinson Humphrey expects $220 billion to $235 billion.

Wells Fargo forecasts $225 billion for 2016. The backlog of committed deals is not huge heading into the new year, a syndicate source said.

Citigroup expects 2016 issuance to drop by 5% relative to that of the past year.

BNP Paribas looks for 2016 issuance to come in 10% lower than that of 2015.

Jefferies looks for 2016 issuance to decrease by 15% versus the past year.

January and beyond

While investors, traders and underwriters expect substantial new issue business to materialize in the year ahead, the early part of 2016 loomed as a question mark as the old year wound down.

“It ought to be a front-loaded year,” a trader said, adding that the visible pipeline is obviously most likely to come in the first half of 2016.

January, however, is a question mark, sources say.

While no one emphatically projected a big January, there could be substantial business in the early part of the year, pending market conditions, sources say.

January issuance from 2010 through 2015 averages $22.2 billion, according to Prospect News data.

The biggest January during that span of years came in 2013, with a blistering $30 billion of issuance.

Of note, 2012, the biggest year in market history, posted only the third-biggest January at $21 billion.

Also notable, last January's $19 billion – with all prices already under a lot of pressure – was the second-lowest since 2010; only January 2010 came in lower at $14 billion.

For a measure of how severe circumstances in the financial markets can curtail high-yield issuance, the year 2009 – which got underway less than four months after the Lehman Brothers bankruptcy in September 2008 – saw just $4.9 billion of January issuance.

One issuer could have a big impact on this coming January, sources say.

Dell Inc. expects to issue up to $25 billion in senior secured and senior unsecured notes to help fund its acquisition of EMC Corp.

Several sources expect at least part of the Dell financing to turn up in January.

Returns

The BofA Merrill Lynch High Yield index was posting year-to-date returns of negative 6% for 2015 to the Dec. 14 close, according to a trader.

With junk indexes posting negative returns for 2015, outlooks for returns in high yield for 2016 forecast improvement, the highest forecasts coming in the mid-single digits.

JPMorgan looks for junk to return 5.6% in 2016.

Citigroup and Morgan Stanley both project 5.1% returns.

Morgan Stanley, in a note to its clients, said that while high-yield returns will likely be competitive with the alternatives, the macro backdrop has become less supportive, and credit risks are broadening.

Barclays looks for 4% to 5% of total returns in the year ahead.

Wells Fargo sees junk returning 3.1% in 2016.

BNP Paribas is looking for 3% returns.

Jefferies forecasts that junk will return 2% in the year ahead.

Uptick in defaults

Continued low oil and commodity prices and higher interest rates have analysts and strategists warning of higher defaults in the year to come.

Morgan Stanley, in a note to its clients, forecasts a default rate of 4.4% for the year ahead. However, extracting energy from the equation brings that rate down to 3.3%.

JPMorgan expects defaults to reach 3% in 2016.

Moody’s pegged the 12-month default rate at 2.8% to October 2015, and projects that it will rise to 3.8% by October 2016.

Fitch Ratings forecasts the 2016 U.S. high-yield bond default rate at 4.5%, as weak commodity prices will continue to challenge energy and metals/mining issuers.

The projected rate equates to $66 billion of defaults and would be the fourth-highest total since 2000.

The Fitch energy default forecast is 11%, eclipsing the 9.7% mark seen in 1999.

Europe’s primary eyed

The European primary market saw its third-biggest biggest year ever, in 2016, with $75 billion equivalent in 186 tranches.

That’s a sharp decrease (30%) from the $107 billion equivalent in 288 tranches issued in 2014, the biggest year on record.

In a note to its investors, Barclays looks for €75 billion to €85 billion of high-yield issuance in 2015, including €50 billion to €60 billion of euro-denominated issuance, about €10 billion equivalent in sterling, and around €15 billion equivalent in U.S. dollars.

Morgan Stanley, in a note to its clients, looks for overall issuance from high-yield non-financials to come to around €80 billion, and adds that there is €42 billion of index eligible debt that needs to be refinanced in the year ahead.

It should be a decent-sized January in the European primary market, according to a syndicate banker, who has visibility on about €2.5 billion in six deals for the first week and a half.

The European market figures to get out of the gates quickly, the source added.

“It ought to be a front-loaded year.” – A trader, commenting on expected bond issuance

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