3NC1 Strikes Back

Winnie Cisar – Global Head of Strategy
Zachary Griffiths, CFA – Senior Analyst - U.S. Strategy
Jordan Chalfin, CFA – Senior Analyst - Technology
Brian Perez – Analyst - Strategy
Kathleen Tang – Analyst - Strategy

  • The recent popularity of 3NC1 issuance by IG nonfinancial corporates has returned to the fore with Apple’s recent deal. Since our initial report on the topic in late February, 3NC1 deal volume has totaled $7.35 billion, accounting for 4.4% of nonfinancial IG issuance.
  • We dug into company filings and found that 21% of the $17.9 billion of 3NC1 issuance since 2022 has been swapped to floating. Several issuers that regularly manage their interest rate risk with derivatives did not explicitly disclose they did a fixed-for-floating swap on the back of their 3NC1 issuance, but we suspect at least some additional swapping has been done on top of the 21% explicitly mentioned.
  • The Treasury 1s3s curve has flattened substantially (inverted further) over the past couple of months, making the 3NC1 structure more enticing for corporates and may contribute to another flurry of issuance in the near term. We recommend clients pick their spots in terms of 3NC1 structures, as several trade very rich in terms of OAS. The widest bonds we found in our screen are WBD 6.412 03/15/26, TRPCN 6.203 03/09/26 and ENBCN 5.969 03/08/26.

In recent months, IG nonfinancial corporates continued to issue short-dated callable bonds at a historically elevated rate. The rise in popularity of this particular structure may be due to interest rate swap/volatility dynamics that allow issuers that enter into a cancellable swap that turns the notional fixed rate tranche into a floating rate obligation to fund a deal at a lower all-in cost than simply tapping the vanilla fixed-rate bullet bond market (Rise of the Corporate 3NC1). The latest issuer to come to market with a 3NC1 is Apple, and our analyst team recommended investors take a pass on that tranche (Apple: 5-Part US$ Benchmark Offering; Pass on 3NC1) as reinvestment risk was too great as it launched at a -40 bp implied spread to the 1y Treasury. Current market dynamics indicate that the new Apple 3NC1 remains unattractive on a spread basis as it trades at an OAS of nearly -100 bp.

We updated our analysis of potential cost savings from a cancellable swap using the recent Apple issuance as our case study. Based on Bloomberg’s SWPM function, we found that Apple could reduce it’s all in funding cost by roughly 30 bp using a combination of a vanilla and cancellable interest rate swap. Our analysts noted that Apple’s 3NC1 launched about 40 bp wide to where similar 3y notes were trading in the secondary market. Apple’s new issue concessions on the other vanilla bullet tranches were roughly 10 bp across the curve. This implies that the incremental spread that Apple had to offer on the 3NC1 was 30 bp relative to a plain vanilla 3Y bond. This means that, if our analysis of the current swap market dynamics are similar to when Apple issued, the company could issue either a 3y vanilla fixed-rate bond or a 3NC1 (and then enter into a swap) at approximately the same cost.

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