In short:
Multiple $10 billion+ deals. Issuers taking advantage of calm following FOMC decision – to get deals locked in. M&A and banks driving supply.
Top talking points:
- Fed raised rates for the first time in over 3 years – calming bond markets: Fed raised from a 3.5% to 3.75% range to a 3.75% to 4% range. This gave the market more confidence that the Fed will take proactive action to control inflation. Longer term rates stabilised – with the 10-year trading at 5%.
- AI-linked credits pricing widened – largely because of a lot of AI-related-concerns news: There was a lot of news last week about slowing the pace of AI development on safety grounds. The massive quantity of AI-related credit supply (so far and expected) together with this type of reminder of unknown unknowns risk has contributed to pushing AI-related credit spreads out.
- The market expects more Fed hikes – so now might be the right time to issue/sell even if rates feel high: The 2-year Treasury yield is now 4.75% – almost 1% higher than the new Fed funds rate. This implies material further rate increases. This could of course be wrong, or the curve could flatten – but given massive demand for long-term money for AI-capex and government spending, there is also a material chance of steepening. A big flattener could be an AI bubble burst – but in that world scenario you might want to have funds already locked in to get through the turbulence.
Primary markets:
Big deals got done this week.
Public Investment Grade – $13.5 billion from UK-based insurance broker Aon to fund its $17 billion acquisition of US-based insurance broker USI from KKR – got orders of $65 billion – 30-year tranche priced at T+115bps. $12 billion from Citi (its biggest ever bond issue), $6 billion from Wells Fargo, €3.75 billion from HSBC, $3 billion from US semiconductor company Analog Devices, $2.5 billion from Deutsche Bank, $1.5 billion from German utility RWE.
Public High Yield – $3 billion from aircraft components supplier TransDigm (6.75% 2035), $2.3 billion from data center operator CleanSpark (7.875% 2031 at 98.5 cents) to build a data center to be leased to a subsidiary of Meta, €1.5 billion from Nordic building services company Assemblin Caverion (7-year, E+300bps). SoftBank launched an $11 billion USD/EUR deal today to finance its OpenAI investment – expected to price on Thursday.
Private credit – Apollo is reported to be in talks to increase the size of its NAV loan to SoftBank backed by Vision Fund 2 assets from $5.4 billion to $9 billion. Following losses from higher oil prices, AirAsia is reported to be looking to change terms on a private credit facility from Ares and Indies Capital Partners – to be allowed to make additional payments to aircraft lessors from reserves currently pledged to the private credit lenders.
Syndicated loans – European LBOs drove a lot of activity. EQT, ADIA and Mubadala launched a GBP 4.1 billion term loan B deal for their buyout of UK product testing company Intertek; a consortium led by Advent and FedEx launched pre-marketing for €4.95 billion of debt for their €7.8 billion buyout of Polish parcel locker company Inpost; Skyborn Renewables secured €2.1 billion in loans to build a German offshore wind farm. Crux AI – the new cloud venture by Blackstone and Alphabet – is reportedly raising $22 billion from a group of 10 banks (the number of banks potentially being increased) – this JV launched last week and has Blackstone investing $5 billion in equity.
Asset-backed – Blackstone is marketing a $1.7 billion US warehouse and logistics asset CMBS. Tesla priced a $750 million EV lease ABS. Data center operator QTS dropped a 10-year tranche from its ABS – pointing towards softening market demand for longer tenors of data center ABS – as issuers prefer shorter tenors to avoid unknown unknowns.
EM – Slow week for EM. Hungarian oil and gas company MOL Group issued a €500 million bond (5-year 4.625%). Indian bank Bank of Maharashtra issued $500 million (BBB/BBB- 5-year 6.1%) – its first international bond.
Distressed/stressed:
Turkish power producer Zorlu Energy’s 2030 dollar bond (issued in 2024) price fell as the company appointed debt advisers. There are growing global market-wide concerns about companies at the bottom of the credit spectrum – with spreads on CCC and single-B rated bonds continuing to widen (increasing dispersion – with the spread between low rated sub-IG and higher rated sub-IG growing). Higher rates are likely to make revenue stress periods tougher for some companies.
Quotes of the week:
“The plain fact is that inflation is too high and has been for too long”
Kevin Warsh, Fed Chair
“The competition for capital is real.”
Kevin Warsh, Fed Chair
“If we go into big data center opportunities or big GPU opportunities or other technology-focused investments, as a credit investor, you’re not getting paid for that upside, and you’re stuck in the investment if it goes sideways”
Jack Neumark, Fortress co-CEO
What to watch this week:
- Oil prices – this remains the biggest swing factor. There is a risk for escalation through October ahead of US midterms on 3rd November.
- Primary markets – we expect a large amount of supply. The markets are currently absorbing this very well – largely on the back of strong fixed income demand because long term rates are close to 25-year highs.
Key data points:
Oil Price (Brent Crude): $96 (down $10 on the week). Still the key macro figure to watch for debt markets.
UST 10-year: 5.0% (flat on the week). Around 25-year highs.
UST 30-year: 5.3% (0.1% lower). Around 25-year highs.
IG Spread (ICE BofA US Corporate OAS): 77bps. Down 3bps on the week. Around 25-year lows.
HY Spread (ICE BofA US HY OAS): 268bps. Up 3bps. Around 25-year lows.
