New Issue Market is White Hot

New issuance for the corporate bond market remains white hot, with several deals getting priced over the last few days. As I follow the building products space, I thought it instructive to highlight some of the deals that have been completed in my coverage universe. Notably, two leading suppliers, Masco Corp (owner of Behr paints, Kraftmaid cabinets, Delta & Peerless faucets, Milgard windows and several other leading brands) and Building Materials Corp of America (#1 roofing manufacturer in the US) tapped the bonds markets this week.

As evidence of the exuberance greeting the new issue market, I am told that both deals were approximately six times oversubscribed, with many investors coming away empty ended. Both bonds priced with a mid 7’s coupon and immediately priced up a point or so in the secondary market (further evidence of an ebullient market). As a point of comparison, Masco’s investment grade bonds traded in the high 70s in December 2008 providing investors a compelling 14% yield (nearly double the level currently implied by its new issue). Even more compelling, BMCA’s junior term loan (the piece of paper just refinanced at par as per the new bond deal) traded at 45 cents on the dollar at the depths of the market in December providing a remarkable 25.5% yield. This is even more striking considering that roofing had record years in 2008 and 2009 as asphalt prices collapsed (key input for roofing) and price increases implemented in 2008 were maintained.

While I am hesitant to call the top of the credit markets (particularly, since it could go on for some time), it is very evident that massive inflows into bond funds are compressing yields to unsatisfactory levels (or at least according to my discriminating standards). Investors have tired of earning zero percent yields in their money market & savings accounts and are moving billions of dollars per week into bond funds. This demand is overwhelming the supply of new paper and driving yields back to 2007 levels.

With quality deals like Masco & BMCA oversubscribed by 6x, it is very clear that we could be in the beginning innings of a renewed credit bubble. However, the new issue market is rapidly gaining steam and will eventually break the back of this technically driven rebound in credit. Sometimes I feel like the guy who was talking about a tech bubble in 1996 or a housing bubble in 2003, but I have little doubt that the credit markets have climbed to unsustainable levels. The only point I can make with relative certainty is that the longer this credit mania endures the more painful the reckoning will be when rationality finally creeps back into the market. Until that point, I would be more inclined to be a buyer of equities vs. debt since companies will be much bigger beneficiaries of cheap credit than their mindless lenders.