Companies across the US are taking advantage of low borrowing costs to extend the maturity of their debt, selling longer and longer dated bonds to investors starved of yield.
So far this year, more than $250bn worth of US bonds have been issued with the primary purpose of refinancing debt that companies have coming due, rather than funding an acquisition, an internal project or a big buyback of shares. That is almost double the amount for the same period last year, according to data from Refinitiv. Add in cases where refinancing is mentioned in a long list of possible uses, and the number rises to almost $870bn.
Much of this debt has repayment schedules stretching out for decades. In aggregate, US companies have sold roughly twice the value of bonds with a maturity of 20 years and 30 years than last year, and more than five times the value of bonds with a maturity of 40 years.
Companies are finding it hard to resist the urge to lock in lower borrowing costs for longer, say market participants.
“If you are a treasurer with debt due next year, why wouldn’t you do it?” said Chris Higham, a portfolio manager at Aviva Investors. “Given what has happened with rates, it is not surprising companies think this is a great time to be issuing.”
A bond binge has taken hold ever since the US Federal Reserve slashed interest rates to near-zero and announced sweeping measures to prop up corporate debt in March, halting a dramatic sell-off caused by the outbreak of coronavirus. Overall, debt issuance by US companies has smashed the record amount sold by companies in a full year, with almost four months left to go in 2020.
Companies initially sought to issue debt to patch over holes in their revenues caused by the pandemic. As yields have tumbled and investor appetite for debt has remained unsated, corporate treasurers are now making more opportunistic moves.
Last month pharmacy chain CVS put out an offer to buy $6bn of bonds maturing up to 2025, while selling $4bn of new bonds split across seven-, 10- and 20-year maturities to finance some of the repurchase. The company’s 10-year bond sold with a coupon of 1.75 per cent, a reduction of 1.5 percentage points from the cost of borrowing for the company when it issued 10-year bonds almost exactly a year earlier.
AT&T did something similar, issuing $11bn of debt at the end of July with maturities stretching out 40 years. That allowed the telecoms company to fund the repurchase of $12.5bn worth of debt that was set to come due over the next five years.
“I know the market rates are low,” said AT&T chief financial officer John Stephens at a virtual conference in August, when the company’s 10-year bond was yielding about 2 per cent. “But quite frankly, that’s the lowest it’s traded since I joined the company in the early 90s.”
The trend to push out maturities had been embedded long before Covid-19 struck. Debt with more than 15 years to maturity comprised 24 per cent of US bonds rated “investment grade” in 2015. Now that share is 30 per cent, according to data from Ice Data Services. More than $2tn of corporate bonds are due in 2035 and beyond — a record sum.
But what is good for corporate treasurers is less good for investors buying the debt, who need to take more and more risk to boost returns.
“The issue now is you have to take so much duration or credit risk to get any kind of yield,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles. “It’s a very frustrating market to invest in.”
Signs of indigestion are emerging. Having hit a record low of 2.84 per cent in August, the average yield on investment-grade debt with a maturity of 15 or more years has inched higher to 3.1 per cent, according to Ice Data Services.
Nonetheless, the pace of issuance is not expected to slow. Bankers are warning corporate clients that if they do not take advantage of ultra-cheap debt in coming weeks, they may not get another chance. The US election in November could cause volatility in markets, making it harder to do deals. Then activity tends to pause for the Thanksgiving holiday.
Meanwhile, there remains the continued uncertainty over the spread of coronavirus, and its impact on the economy.
“I expect this issuance to continue,” said Henry Peabody, a portfolio manager at MFS Investment Management. “It makes sense to term out your debt . . . because there is still a concern for companies having cash on hand if growth doesn’t pick up.”