Atlanta-based home improvement giant Home Depot (NYSE: HD) has braved the recent downturn in the risk-taking tone Monday to sell new bonds.

The company aims to issue at least US$500m worth of 10-year fixed-rate notes, as well as a reopening of its 3.9% debt due June 2047. Pricing of the bonds could be set at spreads in the area of 95 basis points and 120 bps more than comparable U.S. Treasuries, respectively.

Home Depot said it will use proceeds from the sale for general corporate purposes, which may include refinancing existing debt, stock buybacks, capital spending, and acquisitions.

The ‘A’-rated deal is being jointly lead-managed by Barclays, BofA Merrill Lynch, J.P. Morgan, and Morgan Stanley.

Earnings beat and credit profile

The transaction follows Home Depot’s first-quarter of 2019 earnings, which beat market expectations, with a 5.7% year-over-year gain in sales to US$26.4bn and earnings of US$2.27 per diluted share. 

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Home Depot CEO Craig Menear said that he was “pleased with the underlying performance of the core business despite unfavorable weather in February and significant deflation in lumber prices compared to a year ago.”

Menear highlighted that the month of February was the second wettest on record for the U.S., and “lumber prices continued to decline in the quarter, resulting in a negative impact to sales growth” of an estimated US$200m.

Moreover, the company has benefitted from a host of positive factors, including industry trends such as ongoing repair and maintenance projects. The firm’s investments have also been squarely focused on bolstering its infrastructure technology, supply chain efficiency, and in-store improvements while remaining somewhat resilient to discount competitors and online retailers.

Fitch Ratings, which recently affirmed its ‘A’ investment-grade credit rating on Home Depot, noted that the firm has grown EBITDA and posted mid-single digit comparable store sales (comps) every year since 2010, with 5% average annual comps and EBITDA margin growth of over 600 bps to 16.8% in 2018 from 10.5% 2009.

Fitch observed that EBITDA margin growth has been driven primarily by operating expense leverage, as gross margin has trended near 34% during the period.

Fitch analysts David Silverman and Monica Aggarwal noted that the ratings agency’s ‘A’ rating reflects Home Depot’s scale and cash flow generation, coupled with its “solid track record” of comps growth and margin expansion. They added that these factors, in combination with management’s leverage commitments, “instill confidence” in their outlook of adjusted debt/EBITDAR remaining at or modestly below 2.0x over the next 24-36 months.

Wave of volatility

Meanwhile, Home Depot’s latest debt sale falls against a backdrop of rising market volatility, amid escalating trade tensions between the U.S. and China, as well as emerging economic threats stemming from potential U.S.-imposed tariffs on Mexican imports.

The activity has spurred a wave of risk aversion, which has generally swept many investment-grade corporate bond issuers to the sidelines and triggered outflows from corporate funds.

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Ron Quigley, head of fixed income syndicate at Mischler Financial, noted that many investment-grade corporate syndicate desks were “challenged” to provide an outlook for this week’s supply.

He said that most noted that their expectations “specifically” for this week “were dependent on market conditions, tone, and geopolitics.” Quigley added that the “potential issue is the longer they wait the window could open for a short period of time at which point we could be dealing with massive herd instinct.”

The risk aversion has also been sending credit spreads wider, as investors turn to safe-haven assets such as U.S. Treasuries. 

In fact, the yield on the 10-year U.S. Treasury note has fallen by roughly 30 bps since May 21. The note was last hovering at around 2.11% intraday Tuesday.

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Recession Fears

The corporate credit market is further challenged by yield-curve inversion, as well as the Federal Reserve’s upcoming June 18-19 policy meeting.

When the yield curve inverts – when long-term rates fall below short-term rates – a recession typically ensues. This scenario has included the past two recessions, which occurred in 2001, as well as from 2007 to 2009.

Janney Montgomery credit strategists observed that the “closely watched difference” between the 3-month Treasury bill yield (2.342% Friday close), which is largely tethered to the FOMC-engineered Fed Funds rate, and the 10-year Treasury yield (2.125% Friday close), which is more reactive to domestic and international economic performance and expectations, has grown to negative 22 bps.

They underscored that this inversion is the most since the period from August 2006 through May 2007 in the run-up to the 2008 financial crisis and “can be attributed to the primary narratives of trade wars and monetary policy.”

Janney added that bond market “jitters and growing signs of economic uncertainty are injecting increased caution into investors’ calculus, which pushed corporate bond credit spreads wider in May.”

Bloomberg’s high yield index widened by 21 bps to 433 bps on Friday, the largest spread between junk bond yields and U.S. Treasury yields in four months, with investment-grade spreads also moving wider (128 bps on Friday).

Furthermore, for the week ended May 29, Thomson Reuters/Lipper U.S. Fund Flows reported a net outflow of nearly US$5.1bn from investment-grade corporate funds, while high yield funds saw net outflows of US$1.27bn.

Market participants will likely continue looking for any signals that may point to a potential recession on the horizon from the widening inversion of the 3m/10y yield curve, as well as remain watchful of any developments on the trade front, changes in central bank rhetoric, as well as other geopolitical headwinds that could stir an increase in the current level of risk aversion.