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What Amazon’s giant bond auction means for credit markets

What Amazon’s giant bond auction means for credit markets

Amazon’s ‘jumbo’ debt issuance on August 15 shows the huge pent-up appetite for high quality credit in the bond markets, and investors should not rule out other giant firms following suit.

That is according to Citywire + Andreas Michalitsianos of JPM Asset Management and Invesco’s Luke Greenwood, who is Citywire A-rated and co-runs the Invesco Global Investment Grade Corporate Bond fund.

Speaking to Citywire Selector, the two managers said that Amazon had issued $16 billion in corporate debt in order to finance its takeover of upmarket grocer Whole Foods. The move was surprising only in its timing, they said.

Greenwood said: ‘This deal was clearly expected by the market and is around the fourth largest we have seen this year, but I think what is interesting is the timing. We just had the AT&T deal at the end of July, we had the BAT deal last week, so we have seen several ‘jumbo’ deals in what we would normally consider a historically quiet time of the market.’

The huge level of subscription to the Amazon deal, which Greenwood said had attracted around $50 billion for $16 billion’s worth of paper, indicates that there is pent-up demand which could yet be met by a multinational.

‘I would say, for credit as an asset class, there is still cash out there and people want to put it to work. While we are not anticipating any specific ‘jumbo’ deals this year, as they are largely spurred by M&A, we understand why these deals, even in this size, remain attractive.’

Demand driver

His comments were echoed by Michalitsianos, who focuses on the European corporate bond market, and who said that the US market had a habit of responding strongly to high levels of demand.

‘The market in the past few years has been inundated with these jumbo deals. We have seen about $200 to $250 billion worth of M&A-related issuance through 2016 and 2017, but we have had less M&A-led issuance this year.

‘We have been working on the basis that the market is going through something of a slowdown, but in the last few weeks, well, we had $110 billion of new paper in July, with the likes of AT&T in the US, and around $85 billion this month so far.

‘There is clearly a huge demand for high quality, investment grade bonds, even with the high level of supply. Amazon’s new issuance premium, which made bond pricing more attractive, helped garner strong demand. It is not just retail flows either that is going into these bonds, as we are seeing about $3 billion-per-week added into US retail high grade funds, which is of course set against the backdrop of negative rates in Europe, which have been highly stimulative.’

Michalitsianos said that he believed issuance may slow but would not discount any surprising new entrants.

‘Never say never when it comes to the US corporate bond market. We do think issuance will slow and with the Fed clearly projecting its rates path, then there is still time for companies to get paper out ahead of the tapering if they want or need to.

‘The allure remains as it's a broad market – the US, I mean – which can meet demand for high quality bonds without raising the questions somewhere like Italy would, what with its political situation. So there could be more to come,’ he added.

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