Join now for FREE unlimited access to Reuters.com
Sep 23 (Reuters) – Some U.S. companies with top credit ratings are eyeing 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.
Shorter-term debt solutions include getting term bank loans, using bridge loans and issuing bonds with terms of five years or less, capital market bankers said. borrowing and credit investors. While loans may be cheaper than issuing bonds, short-term debt is currently more expensive than longer maturities.
With the move, these companies are effectively betting that aggressive interest rate hikes by central banks that have raised funding costs will drive recessionary headwinds, which would ultimately drive Treasury yields lower.
Join now for FREE unlimited access to Reuters.com
So instead of locking themselves into longer-term debt with higher overall funding costs, they plan to wait out the spike in interest rates.
“We have seen issuers relying on short-term debt solutions as an alternative to long-term bond funding with the aim of moving closer to a better funding environment in the future,” said Maureen O’ Connor, Global Head of Investment Grade Bonds. debt syndicate at Wells Fargo.
“It’s hard to argue against the reasoning.”
The trend, which is now becoming clearer, shows how businesses are coping with unprecedented monetary tightening and uncertainty in global markets.
Some bankers said the approach could be risky. The US Federal Reserve not only raised interest rates rapidly, but also warned markets that it would keep them high for longer. Read more
“Companies looking to wait for more lasting stability may have to wait a long time,” said Meghan Graper, global co-head of the Investment Grade syndicate at Barclays.
UPRIGHT
Despite this, the supply of new high-quality bonds has dwindled, with September issue volumes so far on track to make them the lowest for the month in a decade, according to data provider Informa Global Markets. .
This has affected the supply of good quality assets just as investors need more safe places to hide. It would also reduce 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 though “a number of issuers have pulled out of the markets.”
“What we’ve seen is a shift to shorter-term funding,” Trevithick said.
Earlier this year, Oracle Corp, for example, was widely expected by bankers, analysts and strategists to issue $20 billion in bonds to fund its acquisition of healthcare IT company Cerner Corp.
The $28.2 billion deal was completed in June. Typically, companies take out a bridge loan to fund mergers, but then repay it with a long-term bond issue before closing.
Oracle instead drew $15.7 billion from a one-year bridge loan and took out term loans worth $4.4 billion with three- and five-year maturities that could be repaid by anticipation to refinance the bridge loan.
The tech giant also doubled the size of its commercial paper program to $6 billion and said it could increase the size of the term loan to $6 billion.
More recently, Adobe Inc (ADBE.O) announced that it would fund its $20 billion acquisition of cloud-based design platform Figma with stock and cash, providing a term loan if needed. .
Reuters could not determine Oracle and Adobe’s rationale behind their funding decisions, but the bankers said their actions were evidence of a broader trend.
An Adobe spokesperson said the company was able to fund the deal given its cash flow. “If a term loan is required due to the timing of the deal closing, we expect to repay it promptly,” the company said.
Oracle did not respond to requests for comment.
SHORT-TERM DEBT
Bond syndicate offices had estimated, based on their visibility of the issuance pipeline, that September would see up to $150 billion in new bonds, but on Wednesday only $73.65 billion reached primary markets, according to data from Informa.
Of these, nearly 43% of all new investment-grade bonds listed in September had maturities up to five years, down from around 32% in August and 28% in September last year, the data shows. . This came even as yields on two- and five-year Treasury bills jumped during the month, raising the cost of short-term debt.
Of course, not all companies can afford to wait for better financing conditions. In the junk bond market, for example, some companies pay higher rates to raise funds. Read more
However, stronger companies have more choice and emerge from a period of over-indebtedness.
“So they have the option, in today’s environment of higher absolute coupons, compared to the past decade, to wait or consider other near-term funding options,” said Brian Cogliandro, international union officer at MUFG.
Join now for FREE unlimited access to Reuters.com
Reporting by Shankar Ramakrishnan and Matt Tracy; edited by Paritosh Bansal and Deepa Babington
Our standards: The Thomson Reuters Trust Principles.