Companies are selling US high-grade bonds in record amounts, putting the market on track for its first $1,000bn year and suggesting better-rated issuers are finding ways around the credit squeeze.
Analysts say the growing popularity of investment-grade bonds is a consequence of the difficulties companies are having to sell commercial paper – shorter-term, floating-rate debt.
Although the cost of borrowing in the bond market is rising, rates remain low by historical standards. Bonds also offer companies the opportunity to lock in fixed-rate funding, which could insulate them against further turmoil in short-term market interest rates.
US investment-grade issuance hit a record $94.2bn in September, bringing this year’s total to $766bn, Thomson Financial says. Investment-grade issuance was just under $700bn this time last year. Issuance for all of 2006 was $938bn.
Edward Marrinan, credit strategist at JPMorgan Securities, said “opportunistic borrowers” were turning to the bond market as they “funded share buy-backs, refunded heavy redemptions and looked to sidestep the summer turmoil in the commercial paper market”.
Hans Mikkelson, Bank of America analyst, said he expected investment-grade demand to remain robust, with $80bn-$90bn of new bonds in October and $150bn in the last two months of the year.
Analysts say investment-grade companies, such as General Electric, could take advantage of credit market conditions to strengthen their competitive position.
Large swathes of corporate America, especially in the manufacturing and industrial sector, avoided taking on more debt in recent years, partly because their operations’ profitability provided them with ample cash flow to fund their business.
The outlook for investment-grade bonds stands in contrast to the high-yield market. Third-quarter high-yield bond issuance fell by 70 per cent from last year, making it the worst quarter since 2002, Dealogic said.
The high-yield market began a tentative recovery after a half-point interest rate cut from the Federal Reserve on September 18 and as issuers conceded on pricing and deal terms.
“The market is trying to find a new equilibrium as the balance of power shifts to investors from issuers,” said Taron Wade, of Standard & Poor’s leveraged finance and recovery group.
In the high-yield loan market, last week’s sale of $9.4bn of loans for the buy-out of First Data by private equity group KKR was taken as a sign that investor risk appetite was returning.
Additional reporting by Stacy-Marie Ishmael and Francesco Guerrera in New York
