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Investment Ideas U.S. corporate bond, IPO markets heat up as recession fears persist

Corporate America appears to be rushing to get the most out of the decade-long bull market in stocks and bonds before a possible recession and election-year stock market volatility slam the IPO and credit windows shut.

Approximately 70 companies have registered with the U.S. Securities and Exchange Commission to go public, according to estimates from Renaissance Capital, while US$72-billion in investment-grade corporate debt – a figure nearly as large as the total issuance in August – was issued last week, according to data from Dealogic.

The rash of new deals comes as the U.S.-China trade war weighs on the global economy, helping push 30-year Treasury yields to record lows and increasing fears of a global economic slowdown. U.S. manufacturing activity contracted for the first time in three years in August, while construction spending barely rose in July, helping send business confidence lower, according to the Institute for Supply Management.

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As a result, even companies such as Apple Inc. and Walt Disney Co. that have billions of cash on hand are taking on new corporate debt, taking advantage of the opportunity to lock in historically low borrowing costs while investor demand for yield remains high.

“Companies might as well take advantage while they can. Corporations are getting in while the credit window remains wide open as you just never know when it slams shut,” said Greg Peters, head of multisector and strategy at PGIM Fixed Income, which oversees more than US$809-billion in assets under management.

The increase in corporate debt on the heels of a 24-per-cent decline in borrowing in 2018 will likely be a key topic of discussion at the Federal Reserve’s policy meeting scheduled to begin Sept. 17. While the market is currently predicting a 91-per-cent chance that the Fed cuts interest rates, according to data from the CME Group, signs that corporate lending remains robust may undermine the economic need for lower rates, fund managers and analysts say.

“From where I sit, obviously money is very cheap right now and bond prices reflect a full-blown recession, but I don’t think that’s in the offing,” said Eddy Vataru, a portfolio manager at the Osterweis Total Return fund. “We are going through a weak patch now but it feels like as the days pass and it’s clear that inflation is not obsolete, the market will have to re-price for that.”

IPO FEVER

Expectations for increased stock market volatility and a desire for liquidity on the part of venture capital and private equity firms are helping fuel the packed slate of forthcoming initial public offerings through the end of the year, said Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and IPO ETFs. Food delivery company Postmates Inc. and fitness startup Peloton Interactive LLC are among the companies expected to go public by the end of 2019.

“The IPO market hasn’t shut down, and won’t shut down until returns are poor,” she said, as companies such as plant-based meat maker Beyond Meat Inc. and video-conferencing company Zoom Video Communications Inc. have helped send Renaissance Capital’s IPO-focused ETF up nearly 30 per cent for the year to date.

Jordan Stuart, a client portfolio manager at Federated Kaufmann who focuses on newly public companies, said that any volatility around the 2020 presidential election could weigh on health-care companies that have their stock market debuts next year, prompting some companies to go public by the end of this year instead. Health care is widely seen as the industry most likely affected by a Democratic victory in the presidential election.

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Yet, more companies are making the call that they have a “window of liquidity” through the end of this year, and are rushing at the chance to take it, Mr. Stuart said.

“These companies are looking for capital to grow and they’re reasonably certain that they can get it now,” he said.

The pushback on IPO valuations in the wake of the disappointing performance of hyped debuts from Uber Technologies Inc. and Lyft Inc. is also putting pressure on companies to go public now because they do not expect to get a better deal in the future, said Kevin Landis, a portfolio manager at Firsthand Funds.

The We Co., for instance, could go public with a valuation as low as US$18-billion, roughly a third of the US$47-billion the company was valued at in a previous private funding round.

“There’s a natural bias towards taking the money when it’s available,” he said.

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