U.S. companies are making bond deals amid debt ceiling nerves

U.S. companies are rushing to borrow in the bond market, bringing deals ahead in case the country’s debt ceiling messes up over the summer.

High-rated companies have issued bonds worth $112 billion so far this month, up from $46 billion in May 2022 and more than triple the amount sold in April, according to Dealogic data. Excluding 2020, when ultra-low interest rates sparked a $196 billion borrowing spree, corporate issuance this May was the highest in seven years.

Bankers handling corporate bond deals say borrowers are making the most of a relatively buoyant market environment to tap investors before any volatility erupts due to the US government’s cash crunch – a scenario that could have cascading effects on global asset prices.

“It’s safe to say that issuance has accelerated,” said Richard Zogheb, head of global debt capital markets at Citi.

The deals that have been made reflect a combination of ‘let’s avoid the nonsense of the debt ceiling and take advantage of what is a pretty good market,’” he added.

Bar chart of bond issuance ($ billion) in May, showing that borrowing in the high-quality bond market picked up this month

Market participants say broader concerns about the economy are also playing into decision-making about timing. With the Federal Reserve raising interest rates from close to zero to a target range of 5-5.25 percent in 14 months, fears of a US recession intensified.

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Zogheb said that “the acceleration was someone who planned to go to market in the relatively near-to-medium term, June or July, and instead said, ‘We’re going now. . . we might as well avoid this whole question”.

Debates over the US federal debt ceiling have heated up in recent weeks, with Treasury Secretary Janet Yellen warning that the so-called x-date – the moment when the government runs out of money and is at risk of defaulting on its debt – could come from June 1 .

While the government is widely expected to avoid a default that would occur if it failed to make scheduled payments to investors holding Treasury bonds, a prolonged impasse could disrupt broader transactional activity. The $24 billion Treasury market is considered the deepest and safest market in the world and is referenced globally to determine the prices of many other assets.

U.S. investment-grade bond yields, reflecting borrowing costs, are now below 5.5 percent, down from a peak of 5.71 percent during the banking sector’s failures in March and below last fall’s peak of more than 6 percent. Spreads, or the premium companies pay their investors for Treasuries, have been roughly flat this month.

Yield to maturity (%) line chart showing that US corporate bond yields remain below recent highs

“I think the combination of Treasuries providing a reasonable yield for corporates and the potential for the market to move over the summer on the debt ceiling has made it almost unnecessary for corporates to speed things up,” said Teddy Hodgson of Morgan Co-head of Stanley’s global investment grade syndicate.

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“We’ve seen issuers raise financing to take advantage of favorable market conditions,” said Dan Mead, head of the investment-grade consortium at Bank of America Securities. But the companies are also “aware of the high risk of events”.

“A combination of concerns about the debt ceiling, the Federal Reserve and the economy” is driving it.

May is often a stronger month for issuance, and March and April were weaker after a big February.

Still, 56 companies priced investment-grade U.S. bond deals in May, according to Dealogic data, and more than two-thirds of the proceeds went primarily to finance acquisitions — the highest proportion since December 2021. Drug group Pfizer on Tuesday announced a massive $31 billion bond sale to finance its acquisition of Seagen.

Line chart of options-adjusted spread (percentage points) showing investment-grade spreads in the US have flattened in recent weeks

One market participant, who did not want to be named, said Pfizer, oil and gas group Ovintiv and investment-grade life sciences company Iqvia were among borrowers whose bond sales took place this week slightly earlier than the market expected. was waiting for him.

Pfizer, Ovintiv and Iqvia did not respond to requests for comment.

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Bankers and analysts have pointed out that high-yield, low-rated companies tend to focus more on credit terms and risk appetite than macroeconomic factors such as the debt ceiling and tap capital markets less often than their investment-grade peers.

According to Maureen O’Connor, Wells Fargo’s global head of high-rated debt syndication, “economic uncertainty is weighing on issuers early this year in the form of classic recessionary headwinds. And then the debt ceiling probably added fuel to that fire in the near term, which is why we’re seeing so much volume in May.”

Citi’s Zogheb said the more positive backdrop encouraged issuers to borrow this week, “especially given news that [in Washington] they discussed and things were moving in the right direction”. However, if we make it through the weekend and they say we’ve taken a big step back, we can definitely see volatility. We can see companies backing off.”

O’Connor maintained that the US investment market is “incredibly flexible” and that “there will always be an audience for the right names”.

“I’m trying to preach some calm to those worried that the debt ceiling debate is going to ‘kill’ our market,” he said, “because it just isn’t.”

Source: https://www.ft.com/content/61d6e053-9880-4392-b2db-f1fa53a0a6a4