Uber hits the HY market, as benchmark yields rise

The recent spike in U.S. yields might have pinched prospective bond issuers due to the higher financing costs. Undoubtedly, the latest Fed minutes have prompted further concerns on whether one should pull the trigger, raise debt or whether to wait for further market developments. Surely, having read the latest minutes, consensus is that the economy was evolving as anticipated with a stronger labor market and inflation near the committee’s objective. In fact, the outlook for monetary policy beyond this meeting is for more gradual increases, in line with the view of a sustained strengthening of the economy. The Fed committee member’s perception of a gradual increase is more in line with the more cautious approach to balance the risk of tightening too quickly, which could lead to hinder the economy and thus also inflation.

Looking at this week’s Fed minutes, one would assume that the long-term path is a higher benchmark yield. Indeed, market participants have been lately pricing-in such trend in the 10-year U.S. Treasury, with equity markets being pressured, while primarily investment grade bonds feeling the pinch too.

The dilemma for issuers is whether they should wait for calmer waters or lock-in a yield now. In my view, the former are at the mercy of possibly consistent soft economic data from now on, which in turn might change the Fed’s perception on the pace of interest rates hikes, while the latter would feel the satisfaction of taking the plunge if we continue to experience higher yields.

This week we witnessed the hunger for yield. Uber, the U.S. transportation network company, issued its first high yield (HY) bond. Initially, they were planning to raise USD1.5bn, however following the huge demand they increased the issue to USD2bn. What was interesting in this issue was its secrecy, as they raised the proceeds through a private placement. Such method of financing is typically seen in smaller firms. It also limits the disclosure of information as it is only limited to a number of investors, which in turn might help for a more attractive pricing for the company. The company managed to price 5-year notes at 7.5 percent, while 8-year notes were priced at 8 percent with an expected rating of B- by S&P. It seems that the company opted to lock-in those deals in line with the expectation of higher benchmark yields. They don’t want to take the risk of pricing at higher levels at a future date.

In reality, when looking at the constant strong economic data in the U.S., the probability and pace of further increases in 2019 is on the table. More rate increases would inevitably imply higher interest rates and thus higher borrowing costs.

My take is that in the next year we should experience higher benchmark yields by circa 100bps. That said, one should consider that the higher borrowing costs might ultimately negatively weigh on economic growth. In this regard, we believe that despite the upward trend in the 10-year Treasury, there will be a cap and thus we see a stabilization going forward. We do expect further volatility going forward as yields continue to rise, however as stated in previous articles, we believe that this is creating opportunities. Being selective in such volatile markets is the ingredient for successful investing.