Analysis – Some US companies wait to issue bonds as betting rates are low

Analysis – Some US companies wait to issue bonds as betting rates are low

Written by Shankar Ramakrishnan and Matt Tracy

(Reuters) – Some US companies with better credit ratings are looking for short-term debt solutions as a bridge to a better financing environment within a year or two, slowing new bond issuance despite investor demand.

Capital market bankers and credit investors have said short-term debt solutions include taking out bank term loans, drawing on staging loans, and issuing bonds with maturities of five years or less. While loans can be cheaper than issuing bonds, short-term debt is currently more expensive than longer repayment periods.

With this move, these companies are effectively betting that large increases in interest rates by central banks that have raised funding costs will cause an opposite recession, which will eventually lead to lower Treasury yields.

So instead of locking themselves in long-term debt with higher overall financing costs now, they plan to wait until the rise in interest rates ends.

β€œWe have seen evidence of issuers relying on short-term debt solutions as an alternative to long-term bond financing in an effort to bridge a better financing environment into the future,” said Maureen O’Connor, global head of high-quality loans. debt syndicate in Wells Fargo (NYSE:).

“It’s hard to argue against the rationale.”

The trend, which is now beginning to focus, shows how companies are dealing with unprecedented monetary policy of tightening and uncertainty in global markets.

Some bankers said this approach could be risky. The US Federal Reserve not only raised interest rates quickly, but also warned the markets that it would keep them high for a longer time.

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Megan Graber, global co-chair of the investment grade syndicate at Barclays (color :).

step down

However, the supply of new, high-quality bonds has narrowed, with September issue volumes so far on track to be the lowest in a month in a decade, according to data provider Informa Global Markets.

This has affected the supply of high-quality assets only when investors need safe places to hide. It will also eat up Wall Street bank fees.

Investors are looking for high-quality issuers even as “a number of issuers have fallen off the market,” said Natalie Trevithick, head of investment grade credit at Payden & Rygel and a fund manager. “What we’ve seen is a shift to short-term financing,” Trevithick said.

earlier this year, Oracle Corporation (NYSE:) For example, bankers, analysts, and strategists were widely expected to issue a $20 billion bond to fund its acquisition of healthcare IT company Cerner Corp. (NASDAQ:).

The $28.2 billion deal closed in June. Companies typically take out a bridging loan to fund mergers, and then pay it off by issuing long-term bonds before closing.

Instead, Oracle pulled out $15.7 billion in a one-year bridging loan and took out $4.4 billion in term loans with three- and five-year maturities that can be prepaid early to refinance the bridging loan.

The tech giant also doubled the size of its commercial paper program to $6 billion, and said it could expand the size of its term loan to $6 billion.

Most recently, Adobe (NASDAQ:) Inc said it will fund its $20 billion acquisition of cloud-based designer platform Figma with inventory and cash on hand, offering a term loan if needed.

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Reuters was unable to determine the rationale for Oracle and Adobe behind their financing decisions, but the bankers said their actions are evidence of the broader trend.

An Adobe spokesperson said the company was able to fund the deal given its cash flow. “If the term loan is necessary due to the timing of the closing of the deal, we expect to pay it back quickly,” the company said.

Oracle did not respond to requests for comment.

short term debt

The bond association offices, based on their view of the issuance pipeline, estimated that September would see up to $150 billion in new bond supply, but as of Wednesday, only $73.65 billion had reached primary markets, according to Informa data.

The data showed that nearly 43% of all new, high-quality bonds priced in September had maturities of up to five years, compared to about 32% in August and 28% in September last year. This happened even as two- and five-year Treasury yields rose during the month, driving up the cost of short-term debt.

Certainly, not all companies can wait for better financing terms. In the junk bond market, for example, some companies pay higher rates to raise money. However, stronger companies have more options and come after a period of excessive debt.

β€œSo they have the option in the current environment of having higher absolute coupons, compared to the last decade, to wait or consider other financing options in the near term,” said Brian Cogliandro, international head of union at MUFG.

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