Companies rush to take advantage of sharp drop in borrowing costs

Companies on both sides of the Atlantic are rushing to issue debt, taking advantage of the cheapest borrowing costs available in months following the sharp global bond market rally.

Corporate borrowers in the US and Europe issued $246bn worth of investment-grade and junk bonds in November alone — 57 per cent more than October’s total, and $16bn higher than the average figure for the first 10 months of the year, according to data from LSEG.

The flurry of issuance has continued this week, with highly rated borrowers including General Motors Financial, phosphate producer Mosaic and telecoms tower owner Crown Castle announcing fresh deals.

Further down the credit quality ladder, low-grade borrowers including Kinetic Holdings, automobile financing firm Credit Acceptance and residential mortgage company PennyMac Financial Services are among those joining the ranks of issuers in recent days.

“You don’t see that level of activity the week after Thanksgiving or into December” in a normal year, said Teddy Hodgson, co-head of Morgan Stanley’s investment-grade syndicate.

The acceleration in issuance follows a rapid shift in investor sentiment over the past few weeks, in which markets have begun to price in US and European interest rate cuts in the first half of next year. As recently as October, fears over “higher for longer” interest rates had pushed many companies to press pause on borrowing plans.

“There is definitely a wave of supply trying to get in before year-end,” said Maureen O’Connor, global head of Wells Fargo’s high-grade debt syndicate.

“All the stuff that is trickier throughout a more choppy market environment is finding a welcome reception,” she added. “[Conditions] are so vastly improved from where we were in October that you are seeing some of the more truly opportunistic stuff coming to the market.”

US bonds recorded their best monthly performance in nearly four decades in November, as softer-than-forecast inflation and jobs reports fuelled expectations that the Federal Reserve and the European Central Bank will begin cutting rates as soon as spring 2024.

Treasury yields, which move inversely to prices, have dropped sharply and translated into lower borrowing costs for companies across the credit spectrum.

The average yield for high-grade US bond issuers now stands at 5.52 per cent, its lowest level since July, according to data from Ice BofA. Junk bond yields, meanwhile, are now less than 8.4 per cent, also their lowest level since July.

“It does not feel like a market that’s hanging its boots up for the year. This is one of the most positive backdrops of the year,” said Mark Lynagh, head of global investment-grade finance at BNP Paribas. “[For companies] it’s a great time to go.”

As yields have fallen, the premium over Treasuries paid by corporate borrowers to issue debt has also dropped rapidly, as investors’ appetite for risk has increased. The so-called “spread” on investment grade bonds has fallen to 1.12 percentage points, around its tightest level since February 2022.

Part of the pick-up in issuance reflects “pent-up volume” from deals that had been expected in October and early November, said Richard Zogheb, global head of debt capital markets at Citi. However, there is also “absolutely a component of folks who are seeing [companies] coming to market and what they’re able to achieve, and saying ‘wow, this looks kind of attractive’”.

Pointing to the conflicts in the Middle East and Ukraine, he noted that “there’s still a lot of uncertainty in the world”.

“[Borrowers are saying], ‘if I can move quickly, maybe I should think about accessing this market’,” he added.

So far, overall volumes for the fourth quarter are not expected to be significantly higher than average because of October’s weak volumes, say bankers.

However, the decline in debt costs means that “a number of issuers [are] making a conscientious decision to get ahead of funding next year”, said Morgan Stanley’s Hodgson.

“The investment-grade market rarely holds for considerable periods of time at spreads [at these levels] other than extreme stimulus environments like we saw during Covid,” he added.

Many companies have looming refinancing needs. Investment-grade US companies, for instance, have a record $1.26tn of bonds coming due in the next five years, up 12 per cent from the previous year, according to an October report from rating agency Moody’s. Speculative, or junk-rated, maturities over the same period stood at $1.87tn across bonds and loans — also a new record.

Some said the rush to borrow could also reflect concerns that unexpected data or other developments — for example, a hotter than forecast inflation report — could trigger a reversal in bond yields.

“There is a sense that [the market] might continue to feel good, but it very well might not,” said Wells Fargo’s O’Connor. “So some companies are saying — ‘why not go now, and at least de-risk a portion of my funding needs — if not all of them?’”.

Citi’s Zogheb said the market was likely to remain solid until Christmas. “Ourselves and our competitors are out there encouraging people and saying ‘it feels really good’,” he said.

“Investors believe that inflation is under control and that we are heading for a soft landing . . . but no one knows for sure and things can change quickly.”

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