J.P. Morgan’s Tom Cassin and John Servidea reviewed the investment-grade loan and bond markets for 30 corporate treasurers in the first presentation of the CCT March 11, 2016, online meeting and webcast.
J.P. Morgan’s Tom Cassin and John Servidea reviewed the investment-grade loan and bond markets for 30 corporate treasurers in the first presentation of the Committee on Corporate Treasury’s (CCT) March 11, 2016, online meeting and webcast.
Tom Cassin is the Managing Director and co-head of Investment Grade Finance at J.P. Morgan (JPM), and John Servidea is a Managing Director in the Investment Grade Finance Group.
During the course of their joint presentation, they made a number of observations with respect to high-grade loans, including:
- U.S. high-grade loan dollar volume declined 5 percent in 2015 to $1.1 trillion, reversing a 22.4 percent average annual increase since 2012. The number of transactions fell roughly 27 percent in 2015, after a 7 percent increase the previous year. Nonetheless, tone in the market remained very positive.
- Drawn pricing levels remain fairly stable, with few borrowers finding new pricing lows.
- Overall return and the opportunity for expanded financial relationships continues to drive business, with some lenders exiting select transactions even though most have strong balance sheets and a continued interest to be active in the market.
- For 2016, high-grade loan volume is expected to follow current trends, with the majority of deals for general corporate purposes or commercial paper backstop.
- Most deals will continue to be tenor extensions and refinancing, the result of stable pricing and borrowers’ focus on possible regulatory changes that could affect pricing and capital availability.
- From the lenders’ standpoint, capital allocation and relationship building will affect lending decisions strongly. The trend toward an increase in shorter tenors will continue to be evident, though five years will remain the norm.
- Lender participation likely will remain very active, and broadly dispersed. For example, U.S. based institutions constituted 48 percent of JPM-led deals in the fourth quarter of 2015, followed by 24 percent from Europe and 17 percent from Asia.
- Increased regulatory capital and liquidity requirements will have a real impact on pricing, and could give some foreign institutions a short-term competitive edge.
With respect to the bond markets, Treasury yields have risen a bit as inflation firms and the flight to quality abates. JPM economists see the risk of a recession before year-end rising to 32 percent from 22 percent a month ago. Nonetheless, they forecast core inflation at 2.4 percent and unemployment at 4.5 percent by year end. GDP will average 2.3 percent over the last three quarters of 2016. Given this scenario, expectations are that Treasury yields will actually decline, with the 10-year falling to 2.15 percent.
Spreads initially widened this quarter, peaking at T+251 bps on February 11th, the widest since 2011. This paralleled the weakness in commodity and equity markets and the concomitant rally in Treasury yields. Heavy supply expectations and deteriorating credit metrics are expected to keep spreads relatively stable through 2016 (T+225 at year end).
After a slow start due to market volatility, M&A and debt-financed share repurchases have recovered recently with high quality, frequent borrowers representing the bulk of corporate supply. Offerings across the credit spectrum have been well-received, although new issue premiums have risen for lower-rated names. Spread differentials between rating categories have risen to five-year highs.
The JPM presentation was followed by a review by Bill Fellows of five imminent changes in accounting practices that ought to be of interest to corporate treasurers. Fellows, a Partner in the Deloitte Advisory Financial Transaction Practice, specializes in financial instruments and transactions valuation, accounting, and risk management.
Fellows provided a deep dive on each of the accounting changes, covering their current status, implementation date and transition procedures, as well as a review of the details for each change and their potential implications and/or challenges for corporate treasurers.
The five categories of accounting changes included: the leases project; ASU 2015-02 amendments to the consolidation analysis; impairment (changes to CECL and determining the right impairment model to use); classification and measurement changes in the GAAP (with respect to equity investments and instrument-specific credit risk for fair value option liabilities); and hedge accounting (six targeted improvements to the hedging model).
At the conclusion of Fellows’ review, Terrence Stack, Vice President, Treasurer, Harman International Industries Inc. and Chair of the CCT, conducted a roundtable discussion, focusing on participant ideas for speakers for upcoming CCT meetings. This was followed by a brief FEI provided legislative update.•