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Companies are scooping money out of a bond market awash with liquidity at a startling pace. This is either a happy reflection of an unusually well functioning market or a cause for concern.
September is always a bumper month for bond issuance. Unofficially, the US market pretty much shuts down in August, as bankers and fund managers tend to take a break. Straight afterwards, and particularly after the UK bank holiday and US Labor Day, a back-to-school, back-to-business vibe kicks in, and debt bankers are put through their paces.
But this year is especially lively. Data provider Dealogic says 22 deals priced in the US on Tuesday — the first day back after the long weekend in the country. It was “the busiest day ever!”, UBS syndicate head Armin Peter enthused. The following day brought 26 deals. This is not a case of one or two blockbuster deals skewing the stats. Instead, it is more of a rush.
Also on Tuesday, Europe churned out deals from 10 financial issuers, four companies and three supranational agencies, UBS said. Spain also drew in €60bn of orders for its debut green debt issue — not bad for a €5bn bond. Order books are a famously imperfect measure of true demand, but the gist here is clear.
Adding to the sense that borrowers have never had it so good, the cost of raising funds is super low. Even high-yield debt, often disparagingly known as “junk”, now trades with a yield well below the annual inflation rate in the eurozone. Investors are perfectly happy to take a real-terms loss on lending to the continent’s riskiest issuers.
The 3 per cent rate of eurozone inflation — the highest rate in a decade — may not last. And some borrowers on the junk-rated naughty step may soon clamber back up to coveted investment-grade status. But again, this is a striking sign of the times and of the lengths investors will go to in search of some returns.
Tomas Lundquist, Citi’s European head of debt capital markets for companies, says “remarkable” market conditions have helped to get some striking deals over the line. They include the lowest yield ever on a hybrid bond for yoghurt maker Danone and a rare 40-year maturity on a big corporate deal in euros — for US pharmaceuticals company Eli Lilly. Tesco was the last borrower to stretch the maturity out that long, in 2007.
Investors are not demanding a pick-up in yields over bonds that are already out there, Lundquist adds. “That indicates a market where investors are putting money to work without too much concern,” he says.
So what holes are the pessimists picking in all this? One area of concern is an exuberant “shut up and take my money” attitude, particularly when it comes to the riskiest borrowers, which could mean some investors are taking on outsized risks. In any fresh economic downturn, that could bite hard.
But professional credit fund managers generally know what they are doing, and Lundquist points out that they now have somewhat more time to look at the details when deals launch.
“It used to be that we would announce a deal in the morning, and price it in the afternoon. Now it’s often a two-day process, with more investor work,” he says. Benign, almost sleepy market conditions with gentle volatility mean that deals are less likely to be scuppered during that relatively long process, he notes.
Another possible pitfall is that companies are borrowing for frivolous purposes. In fact, though, companies have switched from borrowing to stay alive in the depths of 2020 to other prudent purposes, such as flipping short-term debt to the long term, relieving pressure in the process. In addition, corporate health on both sides of the Atlantic has improved rapidly over the past year.
With the notable exception of US software company MicroStrategy, run by crypto true believer Michael Saylor, they are not using the money to punt on bitcoin.
Still, one not-so-rosy possibility raised by some bankers in this space is that companies are keen to borrow now, rather than later, because their chief financial officers know better than anyone how inflation pressures are building up in the system.
They see the rising wage bills, the soaring cost of shipping, the shortages of raw materials. Maybe they see something that economists and central bankers, who are largely confident that surging inflation is temporary, do not. Maybe they are less convinced by the “transitory inflation” line than traders and investors, and are more inclined to envisage a somewhat earlier rise in benchmark rates than the markets would imply.
Corporate treasurers of that view would not be the first or the last to forecast — wrongly so far — that yields are heading higher. But their real-life experiences of supply chain snags are clearly worth watching. And either way, the result is likely to be the same: “Our advice to companies is that this is an excellent time to raise financing,” Lundquist says.