A report from Citi Research published on January 27th argues that the ongoing trend of companies issuing new bonds is likely to continue through 2014. Citi analysts Erin Lyons, Swati Verma and Sonam T. Pokwal argue that new debt issuance will be driven by refinancing, increasing capex (especially in the basic materials and tech sectors) and a solid flow of mergers and acquisitions activity across a number of sectors.
The first point the authors make is that investing in new debt issuance has been a profitable strategy over the last few quarters. They then go on to suggest that 2014 will also offer savvy bond investors good opportunities as the debt issuance trend is likely to continue for a while.
Refinancing maturing debt
According to analysts Lyons et al, one significant source of new debt issuance will be the ongoing refinancing of maturing corporate debt. Banks have a great deal of short- and medium-term debt instruments maturing over the next few quarters, and will certainly be active in the debt markets. The analysts also point to the consumer goods, healthcare and tech sectors to be among the most active in refinancing maturating debt.
Odey Discusses Howard Marks’ Astute Observation On Why Hedge Fund Alpha Is Increasingly Rare [January Letter]
According to a copy of the firm's January investor update which ValueWalk has been able to review, the Odey Asset Management Odey Special Situations Fund returned 7.7% in January, outperforming its benchmark, the MSCI World USD Index, by 8.7%. Q4 2020 hedge fund letters, conferences and more The $60 million fund, which Adrian Courtenay manages, Read More
Obviously, not all capex is funded through the issuance of new debt. Many companies already have significant funds earmarked for capex, so only some percentage of capex will be funded through new debt, but the current very low interest rates will encourage companies to issue new debt.
The Citi report elaborates on their thesis. “While the overall expected growth rate for capex is low, in the table below (Figure 6), we show that some sectors are expected to grow while others are not. If anything, those sectors that already have a significant capex base (energy, utilities, telecom) seem to have invested ahead of other sectors, and are now expected to pull back slightly. The biggest growth is expected in the basic materials and tech space.”
More M&A activity
Lyons et al suggest that the ongoing trend toward mergers and acquisitions will continue for at least a few more quarters. Furthermore, the increase in M&A activity will also lead to more debt issuance in 2014. “We’ve kicked off the year with a number of M&A transactions that will require issuance. While picking the credits is difficult, we do expect to see more deals announced involving international players and the selling of divisions of larger business lines. This increased M&A should also prove to be a good source of buying opportunities.”