Retailer TJX Opens a New Bond After Closing Shops

Investment-grade corporate bond sales continue to flood the primary market, amid unprecedented central bank support and despite massive outflows and deteriorating credit conditions.

Deals in the week ahead could amount to roughly US$40bn, if market conditions remain intact, after nearly US$110bn worth of fresh, high grade debt sales priced in the past week.

The blast of new issuance comes amid the Federal Reserve’s recent actions to help shore-up stability in the financial system alongside its dual mandate to promote maximum employment and stabilize prices, as the novel coronavirus continues to wreak havoc in the U.S. and across the globe.

(Click on image to enlarge)

To date, almost 738k of COVID-19 cases have been identified in 177 countries and regions, with around 19.4% of that total having hit the U.S., according to the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University. More than 35k people have suffered fatalities globally.

The Fed noted that while “great uncertainty remains, it has become clear that our economy will face severe disruptions.

“Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

To this end, among several other actions it undertook to help prop-up the financial system, the Fed established two facilities to support credit to large employers – the Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance, as well as the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds.

The central bank said its SMCCF will purchase investment-grade corporate bonds in the secondary market issued by U.S. companies, as well as U.S.-listed exchange-traded funds (ETFs) whose investment objectives are to provide broad exposure to the market for high-grade corporate debt. It continued that the U.S. Department of the Treasury, using an Exchange Stabilization Fund (ESF), will make an equity investment in an SPV established by the Fed for this facility.

The Fed added that it will support the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to US$300bn in new financing, while the Treasury, using the ESF, will provide US$30bn in equity to these facilities.

Mounting Concerns

The Fed’s actions come as Refinitiv U.S. Lipper Fund Flows reported a massive exodus of more than US$38bn out of investment grade corporate funds in the week ending March 25, while high yield funds witnessed net outflows of over US$2.0bn.

Nuveen analysts Bill Martin and John Miller observed that investment-grade corporate bonds in the week ending March 20 had accelerated their decline, losing almost 9% on the week. They noted that spreads had widened 147 basis points, amid short-term funding pressures and slumping oil prices, which closed the week below US$20 per barrel.

Martin and Miller added that secondary trading volume was “above average despite logistical challenges,” such as alternate work locations and separated trading desks posed by the coronavirus. Meanwhile, the primary market was “extremely busy,” they added.

Against this backdrop, syndicate managers generally remain concerned about whether the recent influx of investment-grade corporate bond issuance will continue, as the ongoing virus-induced devastation could spur potential defaults amid historically brutal economic data. Others also worry that the flood of new deals may reach a technical breaking point despite the Fed’s new measures.

According to data compiled by Ron Quigley, head of fixed income syndicate at Mischler Financial, a total of around US$210bn worth of investment-grade corporate bonds priced to date in March, a surge of more than 183.5% over expectations, while to date in 2020, almost US$451bn have been sold – a whopping 41.75% more than in the same year-ago period.

Meanwhile, investment-grade corporate bond issuers continue to storm the gates.

TJX on Tap After Significant Steps to Stave-Off Virus

Among the deals Monday, off-price apparel and home fashions retailer TJX Cos (NYSE: TJX) was set to sell at least US$500m worth of ‘A’-rated debt across four tranches.

Early indications placed pricing on the company’s 5-, 7- and 10-year notes at spreads in the areas of 350bps, while its 30-year bond was quoted at a spread in the area of 362.5bps.

In Monday’s intraday session, yields on 5-, 7- and 10-year U.S. Treasury notes were last quoted at around 0.342%, 0.484% and 0.606%, respectively, while the 30-year bond was trading at around 1.196%.

TJX said it intends to use net proceeds from the sale for general corporate purposes, which may include, funding for working capital, as well as lease, inventory, and compensation expenses.

The offering is being co-lead managed by BofA Securities, Deutsche Bank Securities and US Bancorp.

The new debt sale follows hot on the heels of TJX’s recent announcement that, in addition to several other actions, it would close all its stores in the U.S., Canada, Europe, and Australia for two weeks in response to the “rapidly changing market uncertainty” stemming from the COVID-19 pandemic.

The Framingham, Massachusetts-headquartered company also said it would shutter its online businesses tjmaxx.com, marshalls.com, and sierra.com, as well as its distribution centers and offices, with staff working remotely “when they can,” and with pay.

To further strengthen its financial position and balance sheet, as well as maintain financial liquidity and flexibility, TJX said it would also draw down US$1bn from its revolving credit facilities, suspend its share buyback program, evaluate its dividend payout and review all of its operating expenses.

The firm also withdrew its first quarter and full year fiscal 2021 financial guidance, which it had given on its  earnings conference call, and did not provide an updated outlook.

(Click on image to enlarge)

Gimme Credit analyst Carol Levenson recently noted that the retailer’s liquidity action was “somewhat surprising, considering that at the end of the year TJX had $3.2 billion of cash and no short-term debt.” However, it does have US$750m worth of bonds maturing June 15, 2021, which were last up a little more than 0.80% on the day Monday to US$101.78, according to the IBKR Trader Workstation.

Levenson further observed that TJX’s dividend and share repurchases consumed US$1.1bn and US$1.55bn of cash, respectively, last year, and capital spending was US$1.2bn, or 3% of sales.

Although the company did not comment on traffic or sales trends, its actions imply “a dramatic falloff in business,” Levenson said. She added that TJX is “poorly positioned for these conditions as it sells nonessential products, the ‘treasure hunt’ model requires bodies in the stores, and it has a minimal online presence” despite its “low leverage, healthy margins, and strong free cash flow.”

Indeed, brick and mortar retailers have typically struggled and failed to compete with on-line shopping momentum – fueled by the rise of data analytics and other advances in technology such as augmented reality.

TJX’s new four-part bond offering also comes as cash spreads on consumer discretionary companies gapped-in by more than 16bps on the day Monday, outperforming all other sectors, according to Bloomberg.

While OAS spreads on certain airline pass-through trusts remained significantly wider on the day, along with other beleaguered names such as Darden Restaurants (NYSE: DRI +35bps), AutoNation (NYSE: AN +30bps), Nordstrom (NYSE: JWN +21bps) and Whirlpool (NYSE: WHR +21bps), TJX’s outstanding bonds were only about 1bp wider.

The company’s May 2023s had closed-in around 14bps intraday Monday to 189bps, and its longer-dated bonds maturing Sept 2026 were 8bps wider at 206bps. Its shares have also recovered roughly 27.5% after staging a 41.6% plunge from the end of February to mid-March, according to the IBKR Trader Workstation.

Market participants will likely be paying close attention to the corporate bond market as issuance scales higher, amid unprecedented and volatile conditions in the credit markets.

In the meantime, use the global bond scanner in the IBKR Trader Workstation to locate corporate bonds that are available to trade in the secondary market, along with U.S. Treasuries, municipal bonds, non-us sovereign debt and more.