A potential U.S. dollar-denominated corporate bond sale from Japanese electronics giant Panasonic (OTCMKTS: PCRFY) may be in the works, amid a likely dearth of new issuance in the holiday-shortened week ahead.

Osaka, Japan-based Panasonic is said to have hired BofA Merrill Lynch, Goldman Sachs, and Morgan Stanley to arrange a series of meetings with U.S., European and Asian fixed income investors from July 5 through July 9.

According to Bloomberg, the company may sell at least US$500m worth of senior notes in a 144A / Reg S private placement offering, with maturities that could span between 3-years to 10-years.

Market participants expect the transaction to be rated ‘A-’ by S&P and ‘A3’ by Moody’s.

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Moody’s Japan K.K. in late May affirmed its investment-grade ‘A3’ credit rating on Panasonic Corp while lowering its outlook to ‘negative’ from ‘stable’.

Moody’s analyst Masako Kuwahara noted that the change in outlook reflects the “increasing uncertainty whether Panasonic can generate sufficient earnings to restore its operating margins over the next few years, given the delays in turning its automotive business profitable.”

In its fiscal 2019 financial results, Panasonic posted a ¥37bn year-on-year plunge in its automotive and industrial systems segment – the largest drop among its units – followed by a ¥21.9bn decline in appliances and a ¥16.6bn decrease in eco solutions.

While the company’s overall operating profit was in positive territory, investors have generally been jittery about the auto segment of Panasonic’s business.

The electronics maker said it will focus on its automotive division in its fiscal year 2020, in part by reforming its management structure, as well as increasing spending on battery production. However, Panasonic said the fixed costs associated with the ramp-up of production at its Dalian and Himeji factories is likely to result in a loss of ¥15bn.

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Moody’s said it expected Panasonic’s profitability — as measured by EBITA margin — to fall below 5% in fiscal 2019 but that it could recover to above 5% over the next few years after some restructuring. However, its margin will remain pressured compared to historical levels.

The ratings agency also said it considers the potential for Panasonic’s leverage — as measured by debt/EBITDA — to recover to around 2.0x over the next few years, from improvement in earnings and the company’s conservative financial policy.

The firm’s long-term debt shrunk by about ¥255.3bn year-on-year in FY 2019 to ¥608.8bn, amid a broader deleveraging in Japan.

Furthermore, investors’ perceptions about Panasonic’s ability to manage its financial obligations remain optimistic.

Spreads on the firm’s five-year credit default swaps (CDS) have widened by less than 3.0bps over the past three months to just south of 37.4bps.

Corporate debt deluge continues

With the Bank of Japan having established its negative interest rate policy (NIRP) at -0.1% since at least January 2016 from a previous 0.1% that persisted since December 2008 – in the wake of the housing crisis and credit crunch – the level of non-financial corporate debt in the nation continues to reside at elevated levels.

According to the Bank for International Settlements (BIS), as a percentage of gross domestic product (GDP), Japan’s non-financial corporate debt stood at about 102.6% as of December 2018 from 106.1% ten years prior. The level is still roughly 28% higher than the U.S., but 2.4%, 15.5% and 53% lower than the Euro Area, Switzerland and Sweden, respectively.

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The BIS places the country’s corporate debt at a total of around US$5.13trn at the end of December 2018 compared to about US$6.10trn at the end of 2008. 

Respite from debt issuance

Meanwhile, Panasonic’s suspected deal emerges amid a general dry spell in U.S. dollar, high-grade corporate debt transactions.

Issuance volume is likely to remain low this week, as U.S. financial markets are set to close at 2:00 pm ET Wednesday – and remain closed all day Thursday – in observance of the Independence Day holiday. Also, earnings season is set to spur blackouts in July, keeping the primary market humming at a relatively slow pace.

Ron Quigley, head of fixed income syndicate at Mischler Financial, also pointed out that the month of July ends with the Federal Reserve’s Open Market Committee rate decision, which should keep many issuers and investors on the sidelines.

Quigley highlighted that over the last three years, the month of July has averaged roughly US$94.4bn in investment-grade corporate-only issuance, placing expectations for July 2019 on the “lighter” side — about US$20.3bn less volume or 21.54% lower.

Syndicate managers generally think total corporate bond issuance in July may amount to anywhere between US$70bn and US$75bn after an estimated US$80.3bn priced in June.

Quigley added that potential offerings in the pipeline include deals from FS KKR Capital Corp (NYSE: FSK), as well as South Korea’s Shinhan Financial Group (NYSE: SHG) and Korea Gas (KRX: 036460).

Demand remains intact

Against this backdrop, Panasonic’s potential bond sale should meet with decent interest, as high-grade corporate debt continues to attract global demand for the yield offered in the primary market – especially among those bond buyers who have been priced out of their local markets or have a dearth of available paper.

The yields on 10-year Japanese and German government bonds, for example, were last bid in the areas of –0.155% and -0.360%, respectively.

Fund flows also continue to swell.

For the week ended June 26, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$3.24bn into investment-grade corporate bond funds, while high yield funds posted net inflows of roughly US$1.46bn.

Bond investors will likely be watching for any developments related to Panasonic’s potential bond sale, as well as a myriad of geopolitical risks lining the landscape, including U.S.-China trade negotiations, Middle East volatility, and progress with Brexit, as global growth shows signs of sputtering.

When market conditions are too volatile, corporate bond issuers are typically waylaid from bringing their deals to market. Panasonic’s potential issuance is no exception and would be subject to market conditions.