Corporate funding markets appear to be thawing as the CFOs of a number of highly rated companies face a year-end deadline decision: to refinance maturing short-term debt with bonds at higher rates now or look to shorter term options on chance rates could be lower in the new year.
Many Investment Grade rated companies have spent part of 2020 and last year buying up older, more expensive debt and selling long-term bonds with low coupon rates, often on 10s, 20s and even 30s. year. But not all companies refinanced early, with some uncertain about where rates will move and others hesitant to pay the extra fees associated with submitting their debt sooner than expected.
Since then, the Federal Reserve has raised its benchmark short-term federal funds rate six times, to a range of 3.75% to 4%, and signaled to markets that more hikes are ahead, but at a potentially slower pace, Fed Chairman Jerome Powell said. said Wednesday. In addition, market volatility reduced the opportunities for companies to sell their debt.
Blue-chip U.S. companies have between $550 billion and $750 billion due a year from 2023 to 2027, according to Goldman Sachs Group Inc.,
with approximately $59 billion remaining to be repaid or refinanced in 2022.
“On the corporate side, there are only two or three weeks left in the year to go to market,” said Anna Pinedo, co-head of the capital markets practice at law firm Mayer Brown. “Otherwise, companies may have to wait until the new year.”
Overall, bond issuance by highly rated U.S. non-financial corporations has been significantly weaker this year than in previous years, according to data provider Dealogic. Those companies sold $615.54 billion in bonds to investors through Tuesday, down from $822.26 billion in the year-ago period, according to Dealogic. Of the $615.54 billion, $504.31 billion was new issues, compared to $111.23 billion in refinancings, Dealogic said.
But investor demand for the bonds has been stronger in recent days, leading Amazon.com Inc.
and others with short-term market debt. Amazon has a $1 billion 2.4% bond maturing in February 2023, followed by two more that year, according to data provider S&P Global Market Intelligence. The online retailer said proceeds from this week’s $8.25 billion sale – across five different maturities, at coupon rates between 4.55% and 4.7% – will be used to fund investment initiatives and capital expenditures as well as to repay future maturities.
Meanwhile, eBay Inc.
on November 22, closed a sale of $1.15 billion of senior unsecured notes, at coupon rates of 5.9%, 5.95% and 6.3%. The online market operator has deadlines in January, according to S&P Global.
“Companies tend to refinance months ahead of maturities, so very rarely are they ‘stuck’ having to refinance in a very weak market,” said Beth Hammack, co-head of the global finance group at Goldman Sachs.
However, these offers often come at a higher cost. humane Inc.,
the Louisville, Kentucky-based life insurance provider late last month sold $1.25 billion worth of senior notes with coupon rates of 5.75% and 5.875% coming in at maturing in 2028 and 2033. The company said it would use the net proceeds to repay the 2.9% and 3.15% coupon rate senior notes, both due this year. Humana declined to comment.
“In this current rate environment, we are seeing most transactions that were priced before recent rate hikes are naturally refinancing at moderately higher overall rates,” said Siamak Saidi, managing director of the banking business. business of Wells Fargo & Co.
Zoetis Inc.,
the Parsippany, NJ-based veterinary drug maker placed $1.35 billion in senior notes in early November — at coupon rates of 5.4% and 5.6% — to fund a February maturity with a lower coupon rate of 3.25%.
Wetteny Joseph, Chief Financial Officer at Zoetis Inc.
Photo:
Zoetis
Wetteny Joseph, the firm’s chief financial officer, said he had watched the bond markets for months and seen yields fluctuate, but decided “to see where things work out” given the financial flexibility. of the society. Highlighting the company’s liquidity of $2.51 billion as of September 30, Mr. Joseph said Zoetis would have been able to repay its maturity in cash if needed.
With spreads tight and orders from investors exceeding what the company was offering, Mr Joseph said Zoetis had found the right time to raise funds in the bond markets, even if that meant offering more than in 2013, when the rising $1.35 billion bond was first sold to investors.
Investment bankers say that for companies rated in the investment grade, there is currently little upside to refinancing a maturity longer than a year, as interest rates have risen and spreads have widened. For many well-rated companies, an increase in bond funding costs of 2% to 3% is manageable, bankers say, while for high-yield companies it could spell trouble.
Among the companies that have recently taken on higher cost bond debt is retail giant Walmart Inc.
The company, which has multiple maturities in 2023, raised $5 billion in September, with coupons ranging from 3.9% to 4.5%. Walmart said it plans to use the funds for general corporate purposes, which may include paying off, refinancing or replacing maturing debt.
However, some companies are deciding to hang on and tap into commercial paper or term loan markets instead, bankers said. With some investors expecting the Fed to stop raising rates next year — and some even betting on a rate cut as the U.S. potentially goes through a recession — companies could be better off waiting. .
Conagra Brands Inc.,
a Chicago, Illinois-based food maker took out a term loan earlier this year because it was cheaper than going to the bond markets, chief financial officer David Marberger said. “The term loan has really hedged this fiscal year,” he said. “We don’t have any major deadlines that we need to start thinking about until fiscal year 24, which enters the end of calendar year 2023.”
Mondelez International Inc.,
the company behind Oreo cookies and other snack brands, in September sold $500 million in bonds at a rate of 4.25%, after tapping the market in March for the same amount, but at a rate coupon of 2.125%.
Going forward, the company plans to rely on commercial paper if needed, chief financial officer Luca Zaramella said. “For potential seasonality in business, we will primarily use commercial paper and we will be able to refinance short-term debt and take advantage of interest costs that drop when that happens,” Ms. Zaramella.
Write to Nina Trentmann at [email protected]
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