Analysis-Some U.S. firms wait to issue bonds in a bet rates will come down
2:26 pm Friday, September 23rd, 2022
By Shankar Ramakrishnan and Matt Tracy
(Reuters) – Some U.S. companies with the best credit ratings are looking at shorter-term debt solutions as a bridge to a better funding environment in a year or two, slowing new bond issuance despite demand from investors.
The shorter-term debt solutions include getting bank term loans, drawing down on bridge loans and issuing bonds with maturities of five years or less, debt capital market bankers and credit investors said. While loans can be cheaper than issuing bonds, shorter-term debt is currently more expensive than longer tenors.
With the move, these companies are effectively betting that aggressive interest rate increases by central banks that have raised funding costs will cause recessionary headwinds, which would eventually lead to lower Treasury yields.
So instead of locking themselves into longer-term debt with higher all-in funding costs now, they plan to wait out the surge in interest rates.
“We have seen evidence of issuers relying on shorter-term debt solutions as an alternative to long-dated bond financing in an effort to bridge to a better funding environment in the future,” said Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo.
“It is hard to argue against the rationale.”
The trend, which is coming into focus now, shows how companies are navigating an unprecedented monetary policy tightening and uncertainty in global markets.
Some bankers said the approach could be a risky one. The U.S. Federal Reserve has not only been raising interest rates quickly but also warning markets that it would hold them high for longer.
“Companies looking to wait for more sustained stability may have to be patient for a long time,” said Meghan Graper, global co-head of investment grade syndicate at Barclays.
Even so, the supply of new high-grade bonds has shrunk, with September issuance volumes so far on track to make it the lowest for the month in a decade, according to data provider Informa Global Markets.
That has hit the supply of good quality assets just when investors need more safe places to hide. It would also eat into fees for Wall Street banks.
Natalie Trevithick, head of investment grade credit at Payden & Rygel, a fund manager, said investors were looking for higher quality issuers even as “a number of issuers have been standing down from the markets.” “What we have seen is a shift to shorter-dated financing,” Trevithick said.
Earlier this year, Oracle Corp, for example, was widely expected by bankers, analysts and strategists to issue $20 billion worth of bonds to fund its acquisition of healthcare IT firm Cerner Corp.
The $28.2 billion deal closed in June. Typically companies take a bridge loan to fund mergers but then pay it down with a long-dated bond issue before closing.
Oracle instead drew down $15.7 billion from a one-year bridge loan and took out term loans worth $4.4 billion with three year and five year maturities that could be prepaid early to refinance the bridge loan.
The tech giant also doubled the size of its commercial paper program to $6 billion and said that it could expand the size of the term loan to $6 billion.
More recently, Adobe Inc said it will fund its $20 billion acquisition of cloud-based designer platform Figma with stock and cash on hand, throwing in a term loan if necessary.
Reuters could not determine Oracle’s and Adobe’s rationale behind their funding decisions, but bankers said their actions were evidence of the broader trend.
An Adobe spokesperson said the company was able to finance the deal given its cash flow. “If a term loan is necessary due to timing of the deal closing, we expect to pay it back quickly,” the company said.
Oracle did not respond to requests for comment.
Bond syndicate desks had estimated, based on their visibility of the issuance pipeline, that September would see as much as $150 billion of new bond supply, but as of Wednesday only $73.65 billion has made it to the primary markets, according to Informa data.
Of those, nearly 43% of all new high-grade bonds priced in September carried maturities up to five years compared to around 32% in August and 28% in September last year, the data showed. This has happened even as two-year and five-year Treasury yields jumped during the month, raising the cost of short-term debt.
To be sure, not all companies can afford to wait for better funding conditions. In the market for junk bonds, for example, some companies are paying higher rates to raise funds. Stronger companies, however, have more choice and are coming off a period of bingeing on debt.
“So they have the option in the current environment of higher absolute coupons, compared to that of the last decade, to wait or look at other near-term funding options,” said Brian Cogliandro, international head of syndicate at MUFG.
(Reporting by Shankar Ramakrishnan and Matt Tracy; editing by Paritosh Bansal and Deepa Babington)