Corporate Financing Analysis - Sluggish US Growth To Weigh On Yankee Bond Issuance - 04 DEC 2017

After catching the eye with a record haul of announced deals in 2015, the so-called yankee bond market has struggled to keep the momentum going ever since. Indeed, US dollar-denominated bonds issued by non-US firms in the domestic US market slumped to a level of USD3,150mn across just two deals in 2016, down from a bumper USD10,862mn raised across 19 yankee bond notes sold a year earlier. While the yankee bond market has since shown signs of life once more in 2017, with seven deals worth a combined USD6,600mn successfully sold, activity by deal volume remains well off the former highs enjoyed by foreign companies selling such deals. Indeed, the market is currently on course to record its second quietest year for deals since the turn of the millennium. In contrast, however, deal value looks set reach its third highest level on record, behind only the hauls recorded in 2014 (USD7,174mn) and 2015.

Back In Favour
Full-Year Global Yankee Bond Issuance By Deal Value, USDmn
Source: Bloomberg, BMI

The decrease in deal volume, combined with the decrease in value, tells us one thing: the average size of the deals being completed is increasing quite significantly. Indeed, while yankee bond issuance may be slowing, and as the market becomes less appealing to potential overseas issuers looking to tap into the US bond market, it can still be potentially welcoming for larger deals.

2017 ' s Largest Deals

Of the seven yankee bond deals sold so far this year, the largest has been Canadian integrated energy firm Suncor Energy's USD500mn deal sold in November. The note sale carried a 4.0% coupon, which ranks as the largest of the y-t-d period, with a callable maturity set for 2047. The transaction was also only one of two not to originate from the banking sector, with the other being a USD250mn sale from Canadian services firm Waste Connections completed back in February - a deal which also carried a large coupon of 3.49% and a maturity date of 2027. The success of these two transactions alone has kept Canada at the top of the nationality rankings for yankee issuance for the second year running. The remaining five deals sold in the 2017 y-t-d period were completed by just two firms: three yankee bond transactions were sold by Deutsche Bank AG/New York AG comprising USD500.0mn, USD1.1bn, and USD1.0bn deals; two yankee notes were sold by Royal Bank of Scotland Group, both USD1.5bn deals.

Collectively, these transactions combined to see the y-t-d tally of yankee bond issues value USD6,6bn. With around a month of 2017 left to run, we note that this is already more than double the value of deals recorded across the 2016 full-year period - which came to USD3,15mb - and a more than three-fold increase on just the two yankee bond deals launched last year.

Risky Business

Debt capital market (dcm) investors looking to take a bet on the yankee bond market understandably want to be adequately compensated for the elevated level of risk that they are taking on board. As recent data from Fitch Ratings would suggest, the risk factor among such deals is currently sat at an eight-year high. Indeed, according to the latest available data, the Yankee trailing twelve-month (TTM) default rate climbed above 8% in November, its highest level since 2009 and a long way above the 2.2% rate for yankee bond deals recorded by Fitch Rating as recently as July 2017. While there are a number of factors which have contributed to the recent H217 spike in the yankee default rate, we highlight that Petroleos de Venezuela SA's (PDVSA) processing delays resulted in late principal payment on its bonds, coupled with Pacific Drillings' bankruptcy as key contributors to this trend. This leaves the yankee ratio a long way above the current 2.5% average forecasted by Fitch Ratings for the US high-yield bond arena more broadly in 2018. More specifically, BMI notes that, as of the end of July 2017, there were as many yankee bonds listed as 'of concern' by Fitch as there have been successfully issues this year. Indeed, seven outstanding bonds greater then USD100mn have been weighing on the market with PDVSA's deal the largest among them.

The Unfavourable Macroeconomic Backdrop

The downturn in yankee bond issuance, coupled with large coupons being required to get deals across the line, support our broader view that the volume of deals seen during the banner year of 2015 was always going to be unsustainable over the medium-term ( see ' Yankee Bond Rally begins To Show Cracks ' , July 20 2016). With the prospects for the US economy slowing to a more resilient (yet underwhelming) level, we expect activity in the market for US-denominated bonds issued by non-US firms in the domestic US market to tail off further in H118 and potentially beyond too.

The US economy posted its second consecutive quarter of annualised growth of 3.0% q-o-q or above in Q317, beating both consensus and regional Federal Reserve 'nowcast' estimates which estimated growth of about 2.6%. Despite this, BMI's Global Team maintains a below consensus outlook on US growth prospects at present. Our below consensus forecast is due to the resiliency the US economy showed in Q317, which prompted us to revise up our 2017 and 2018 growth forecasts by 0.1pp to 2.2% in both years. We do not believe, however, that the current rate of growth is sustainable. In addition, we do not anticipate major stimulatory policies in the quarters ahead apart from moderate tax cuts which already appear to be factored into consensus forecasts. As a result, our 2018 growth forecast remains below the Bloomberg consensus estimate of 2.4%. We see a relatively moderate pace of rate increases over the coming year too, with our 1.75-2.00% end-2018 Fed funds rate forecast placing us in between futures markets on the low end and Bloomberg consensus projections and FOMC voters on the high end. While far from a doomsday forecast for yankee bonds, this is also not an outlook that will serve as a great advert for the markets for such deals, and with risk levels rising once more, we are forecasting activity to remain depleted over the coming quarters.