Corporate bond issuance off to a bang in September


Corporate borrowing is off to the races.


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Companies wasted no time going back to the borrowing trough after the long Labor Day weekend.

U.S. investment-grade companies already borrowed $46.7 billion in the bond market this month through Wednesday, a single day that accounted for $21.3 billion of the total, according to BofA Global Research.

Notable among the week’s deluge was a debut $1 billion green bond issued by JP Morgan Chase & Co.
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putting it alongside other major corporations from Google parent Alphabet
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to Visa Inc.
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which in recent weeks have raced to borrow with do-good purposes.

September often can be a busy month for corporate borrowing, as companies focus on the remaining weeks left in the year to lock in optimal financing — meaning before Thanksgiving, when the typical year-end lull begins to take hold.

Here’s a look at how September bond issuance stacked up over the past five years:

The pandemic has made this year anything but typical, including with a record $1.5 trillion already borrowed by investment-grade companies so far in 2020 to help fund their operations through the year’s end.

Many highly rated businesses borrowed fresh mounds of debt at lower rates than ever before, even though they are now carrying record levels of leverage.

Read: U.S. corporate debt soars to record $10.5 trillion

However, with the Federal Reserve’s unprecedented pandemic support, there’s little reason to think big businesses have had enough of today’s ultra-low borrowing rates.

“It’s a very busy September,” said Wendy Wyatt, a portfolio manager at DuPont Capital, of investment-grade bond supply. While she doesn’t expect to see the same eye-popping borrowing boom as in March, April and May, when companies were panic-borrowing, Wyatt has been encouraged by the recent trend where bond issuance has been used by more companies to kick their debts down the road or to repay near-term maturities.

“It’s not hideous. It’s a smart business decision,” she said of the debt replacement or reduction strategy, even through she’s also keeping an eye on companies that look to take on more debt to fund mergers and acquisitions.

“M&A has picked up and you’ve got to be cautious about that,” she said.

Related: Coronavirus slashes deal-making globally: What to expect next

To be sure, some of the big winners of the pandemic debt boom have been investment banks hired to arrange the funding.

Revenue at investment banks jumped 32% to $101.6 billion in the year’s first half from a year prior, its highest level since the first half of 2012, according to Coalition, a global analytics company.

What’s more, Coalition expects the year’s swift uptick in investment banking business, particularly in fixed-income, currencies and commodities, to combine with further head-count reductions at banks and produce an 12% return on equity for institutions it tracks in its index.

That would mark a significant reversal of a trend where ROE for banks in the index have declined each year since 2016, when it hit 9.5%.



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JP Morgan enters green bond push with $1 billion debut debt deal


The San Francisco skyline is obscured in orange haze Wednesday.


AFP/Getty Images

JP Morgan Chase & Co. entered the green-bond world on Wednesday, offloading the bank’s first set of bonds specifically to fund projects with a sustainability bent.

While the banking giant has arranged debt with an environmental or social-good purpose for its clients and other companies, this was JP Morgan’s first $1 billion foray into issuing such bonds on its own behalf.

Many investors welcomed the move, not only because of the weight JP Morgan
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carries in the market as the nation’s biggest U.S. bank by assets, but also because of a growing acceptance within the U.S. that a climate crisis threatens both environmental and financial instability.

Read: CFTC’s groundbreaking climate-change report sounds a bipartisan alarm on costly risks for U.S. financial system

JP Morgan’s bond deal hit as wildfires raged along the West Coast, with smoke from fires shrouding the San Francisco Bay Area on Wednesday in an eerie orange haze and underscoring how climate change threatens to make extreme fire events, power outages and forced evacuations the norm.

“The more the larger players come along, the larger the scale to move things along faster,” said Steve Liberatore, Nuveen’s lead portfolio manager for environmental, social and governance (ESG) criteria and impact investments.

But Liberatore also stressed that a key part of tackling the unfolding “climate disaster” is to mitigate it in an “economically beneficial way for the average person.”

That can mean achieving a lower cost of capital for renewable energy projects than what’s available for funding fossil fuels.

To that end, JP Morgan was able to pull in pricing Wednesday amid high investor demand, clearing the bonds at a spread of 48 basis points over Treasurys BX:TMUBMUSD10Y, after they initially were floated in the range of 65 basis points.

A bond spread is the level of compensation investors get paid above a risk-free benchmark to act as a creditor, with lower spreads often indicating high demand or a lower expectation of default.

“Generally, green bonds yield less, meaning the cost of financing is lower,” said Pri de Silva, senior corporate credit analysts at Aware Asset Management, adding that JP Morgan priced similar bonds in May that were trading on Wednesday closer to 58 basis points over Treasurys.

“From a funding perspective, I’d say there was a 10-basis-point advantage,” de Silva said, even though he noted the “sunk costs” involved in setting up the new green issuance platform, including providing the “belts and suspenders” to ensure there’s a process in place to track that only eligible projects are funded.

To that end, JP Morgan said proceeds from the debut green bond would finance a range of projects from green buildings to renewable energy, in a public filing.

Notably, the bank also listed areas that will be excluded from the funding from bond proceeds, including coal, oil, gas and nuclear energy projects, as well as activities that involve modern slavery, child labor and human rights exploitation.

Amid an overall corporate debt boom, the second quarter also saw a record $99.9 billion of “sustainability bonds” issued globally, according to Moody’s Investors Service, a category that encompasses green, social and sustainable bonds.

JP Morgan’s debut follows on the heels of Citigroup
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and Bank of America
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which issued green and social-good bonds earlier this year.

See: Bank of America sold a first-of-a-kind Covid-19 bond

“Banks are in a unique position to issue green bonds as they are interrelated with the broader economy,” said Brian Ellis, portfolio manager, Calvert Green Bond Fund.

“From an investor’s perspective, growth in green bond issuance provides increased opportunities for portfolio and project diversification, but also the ability to be more selective because there’s a larger group to choose from.”

JP Morgan declined to comment.



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Mall owners Simon, Brookfield close to buying J.C. Penney out of bankruptcy


A shopper heads into a J.C. Penney store in Seattle in 2017.


Associated Press

NEW YORK — Mall owners Simon Property Group and Brookfield Property Partners are close to a deal to buy department store chain J.C. Penney out of bankruptcy and keep the chain running.

Penney’s lawyer Josh Sussberg announced the tentative pact, which will save roughly 70,000 jobs and avoid liquidation, during a brief hearing in bankruptcy court Wednesday.

Sussberg said that the Penney
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would have an enterprise value of $1.75 billion, including $300 million in cash from the two landlords and $500 million in new debt.

He noted that a letter of intent including more details of the pact will be filed with the bankruptcy court in the next day. Penney will be left with $1 billion in cash after the deal is completed, he said.

“We are all committed to moving this quickly and saving J.C. Penney,” Sussberg said during the court hearing.

The 118-year-old department store based in Plano, Texas, filed for Chapter 11 bankruptcy protection in mid-May, one of the biggest retailers to do so since the pandemic temporarily shut down non-essential stores around the country. As part of its bankruptcy reorganization, Penney said it planned to permanently close nearly a third of its 846 stores in the next two years. That would leave it with just over 600 locations.

More than 40 retailers have filed for Chapter 11 bankruptcy this year, including more than two dozen retailers since the coronavirus outbreak. Among the hardest hit have been department stores, which were already struggling to respond to shoppers’ shift to online shopping.

The tentative agreement between two big landlords and Penney is the latest example of mall owners’ increasing willingness to buy out their pandemic-hit tenants. Mall owners are facing big challenges as stores close or are unable to pay rent. The exit or closing of retailers also triggers a clause that would allow other tenants to break their leases or get a rent reduction without facing penalties.

In fact, a retail venture owned by licensing licensing company Authentic Brands Group and Simon agreed to purchase 200-year-old clothier Brooks Brothers for $325 million last month.

Neither Simon
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nor Brookfield
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responded to requests for comment regarding the tentative deal with Penney.



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When the Nasdaq has had as ugly a start to September as it just had, it has always finished the month lower


Technology stocks got wrecked Tuesday on Wall Street, and that bodes ill for the rest of the month, according to Dow Jones Market Data.

The decline in the Nasdaq Composite Index
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pushed the tech-heavy index into a correction, commonly defined as a drop of at least 10%, but no more than 20%, from a recent peak, and reaffirmed the bearish view that tech-related stocks had mounted too brisk a run-up in the aftermath of the worst public-health crisis in a century.

Tuesday’s bitter slump, resulting in a 4.1% drop for the Nasdaq Composite, marked the worst start to the index in September, a notoriously weak month for U.S. equities, on record. The index has sunk 10% over the past three sessions, following a record close Sept. 2.

And the stats for the outlook for the market appear to show that it’s tough for the index to recover from the likes of the downturn it just faced.

When the Nasdaq has previously tumbled by at least 4% in the first five days of September, it has ended lower. The Nasdaq has booked five Septembers since 1974 (not including Tuesday’s drop) in which it registered declines of at least 4%, and in four of those five declines — 1974, 2000, 2001 and 2008 — the equity benchmark added to its losses (see attached chart):


Dow Jones Market Data

To be sure, that’ s hardly a significant sample size, but it’s still a stat worth considering as the market looks to right itself following three withering days for formerly high-flying tech stocks.

The moves by the Nasdaq Composite may also have broader implications for the market as a whole, since buzzy tech-related names like Tesla Inc.
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Apple Inc.
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,
Amazon.com Inc.
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,
Facebook Inc.
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,
Google parent Alphabet Inc.
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and Netflix Inc.
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which have represented the handful of mega-capitalization companies that have all helped to power this resurgence in equities in the throes of a pandemic, all are sitting on multiday losing streaks.

Although bullish investors hope that the declines in the index helped to clear away some of the frothiness that had accumulated since the March lows for the stock market, there are some concerns that the tech wreckage could portend longer-term bad news for the Dow Jones Industrial Average
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and the S&P 500 index
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which also skidded by more than 2% on Tuesday.



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Millennials to redistribute wealth from older generations to the young in new ‘age of disorder’, warns Deutsche strategist


It probably won’t take a great deal of persuasion to convince investors that there’s an “age of disorder.”

That’s the title of a new Deutsche Bank research note, which says the world is entering its sixth distinct era of modern times.

So say goodbye to the “era of globalisation” and brace yourself for the “age of disorder” where millennials, firmly established as the generation of ‘have nots’, take their revenge and redistribute wealth from the old to young. Millennials are usually defined as those between the ages of 22 and 38 years old in 2019, according to Nielsen Media Research .

The note by strategist Jim Reid warns the discussion of inequality within and between countries will not be limited to wealth and income.

“In fact, an issue that is quickly emerging as a political force is the intergenerational gap,” the report says. “Assuming life does not become more economically favourable for Millennials as they age (many find house prices increasingly out of reach), this could be a potential turning point for society and start to change election results and thus change policy.”

Read: Millennials’ shifting tastes are boosting sales of whiskey and tequila

The votes for Brexit in the U.K. and President Donald Trump in the U.S. in 2016 left many younger people feeling angry and alienated by political decisions that a sizable majority of them were against, the report says.

This could see the revenge of the millennials as they take more control and skew policies to redistribute wealth away from older generations to the young.

“Such a shift in the balance of power could include a harsher inheritance tax regime, less income protection for pensioners, more property taxes, along with greater income and corporates taxes . . . and all-round more redistributive policies”, the Deutsche Bank report said.

The ‘new’ generation might also be more tolerant of inflation insofar as it will erode the debt burden they are inheriting and put the pain on bond holders which tend to have a bias towards the pensioner generation and the more wealthy.

“The older generation may also have to be content with lower (or even negative) asset price growth if the younger generation does not have a sudden income boost. This will be a big break from the status quo and lead to far more disorder than in the prior era of globalisation.”

Read: Gen Z, Millennial Investors Embrace Risk Amid Covid: E*Trade

The report suggests 2020 may be the start of a new era, as the coronavirus pandemic brings the era of globalization since 1980 to a close.

“The era of globalisation to we are likely waving goodbye saw the best combined asset price growth of any era in history, with equity and bond returns very strong across the board. The Age of Disorder threatens the current high global valuations, especially in real terms,” said the report.

What will this new age bring?
• Deteriorating US/China relations and the reversal of unfettered
globalisation.
• A make-or-break decade for Europe, with muddle-through less likely
following the economic shock of COVID-19.
• Even higher debt.
• Inflation or deflation? As a minimum, it is unlikely it will calibrate as easily as we saw over the last few decades.
• Inequality worsening before a backlash and reversal takes place.
• The intergenerational divide also widening before millennials and younger voters soon start having the numbers to win elections and, in turn, reverse decades of policy.
• Linked to the above, the climate debate will build, with more voters
sympathetic and thus creating disorder.

We’re in the midst of a technology revolution with astonishing equity valuations reflecting expectations for a serious disruption to the status quo, the report says, questioning whether this is a revolution or bubble?
Much depends on whether working from home becomes more permanent, and if so it predicts it will cause major changes to societies and economies.

Tesla
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,
Amazon
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and Facebook
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are all companies that have seen their valuations soar in recent times on Nasdaq
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.

Read: Opinion: China’s economy may be back on track, but problems plague it elsewhere

The most worrying prediction is an economic battle between the U.S. and China.

“The result of the US election in November is unlikely to change the direction of travel,” the report says. “Over the course of this decade, relations will likely deteriorate into a bipolar standoff as both the US and China seek to prevent encirclement by the other. Companies that have embraced globalisation will be stuck in the middle if relations sour as we fear.”

There have been 16 occasions over the last 500 years, when a rising power has challenged the ruling one, and on 12 occasions it ended with war. One piece of solace is the report notes that military conflict is unlikely.

Watch: Donald Trump suggests ‘decoupling’ US economy from China



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