One bond drags down the entire new-issue sector: Skydance's (SKYD.US) $30 billion new bond underperforms investment grade by 27 basis points, the worst in six and a half years

JPMorgan says the high-grade bonds sold by Skydance (SKYD.US) on Sept. 30 were subsequently hit by a selloff, causing the new issue to underperform the broader market by the most since the worst days of the Covid-19 pandemic. As of Oct. 8, the 10-day relative performance of the new bonds was 27 basis points worse than the bonds in the bank's investment-grade index, strategists led by Nathaniel Rosenbaum wrote in a report Tuesday. That's the widest gap in six and a half years. Excluding Skydance, new issues outperformed by about 4 basis points, they added. The weak showing "fits the broader pattern this year of increasingly unpredictable new-issue performance," the strategists said. As a result, investors need to consider the potential for such bonds to lag other high-grade securities "more carefully than in the past," even with market spreads at tight levels. The Skydance-induced softness in new bonds helps explain why last week's issuance was well below dealer expectations despite strong fund inflows and lower rate volatility, according to JPMorgan. Given that April 2020 saw record bond issuance and average spreads on high-grade bonds in the JULI index were 2.7 times current levels, "last week's underperformance is far more severe by comparison," the strategists said. A brand-new Hollywood giant In early October, Paramount Skydance completed its massive $110 billion acquisition of Warner Bros. Discovery, with the combined new company officially named Skydance marking the birth of a brand-new Hollywood giant. Paramount completed the key financing for this century-level media acquisition, but the more expensive cost of capital has also raised the operating threshold for the combined company in advance. Within just one week, the company completed the pricing and distribution of about $52 billion in bonds and loans, including $30 billion in investment-grade bonds, about $12.4 billion in high-yield bonds and $9.46 billion in loans. The deal brings together film studios such as Mission: Impossible, Harry Potter and DC Studios with major television and streaming networks including CBS, CNN, Paramount+ and HBO Max, creating a comprehensive entertainment company spanning film, television and news operations. The transaction finally closed after nearly a year of turbulent battling, further intensifying the concentration of power in the Hollywood industry which is already dominated by a handful of large companies. Several U.S. state governments and the Hollywood writers' union previously reached settlements with the deal, removing major legal obstacles facing one of the largest media industry mergers in history. The merger comes as Hollywood faces multiple pressures, including continued cable TV subscriber losses, high costs of competing for streaming users, and persistent pressure from unions over jobs and the rights of creative workers. Skydance CEO David Ellison said last week that the name Skydance was chosen to preserve the respective brand identities of the two major film studios, Paramount and Warner Bros., rather than integrating them under an entirely new brand.