Analysis-Some U.S. firms wait to issue bonds in a bet rates will come down

By Shankar Ramakrishnan and Matt Tracy

(Reuters) – Some U.S. corporations with the most effective credit score rankings are shorter-term debt options as a bridge to a greater funding surroundings in a 12 months or two, slowing new bond issuance regardless of demand from buyers.

The shorter-term debt options embrace getting financial institution time period loans, drawing down on bridge loans and issuing bonds with maturities of 5 years or much less, debt capital market bankers and credit score buyers stated. Whereas loans might be cheaper than issuing bonds, shorter-term debt is presently costlier than longer tenors.

With the transfer, these corporations are successfully betting that aggressive rate of interest will increase by central banks which have raised funding prices will trigger recessionary headwinds, which might finally result in decrease Treasury yields.

So as an alternative of locking themselves into longer-term debt with increased all-in funding prices now, they plan to attend out the surge in rates of interest.

“We have now seen proof of issuers counting on shorter-term debt options as an alternative choice to long-dated bond financing in an effort to bridge to a greater funding surroundings sooner or later,” stated Maureen O’Connor, world head of high-grade debt syndicate at Wells Fargo.

“It’s arduous to argue towards the rationale.”

The pattern, which is coming into focus now, reveals how corporations are navigating an unprecedented financial coverage tightening and uncertainty in world markets.

Some bankers stated the method could possibly be a dangerous one. The U.S. Federal Reserve has not solely been elevating rates of interest shortly but in addition warning markets that it could maintain them excessive for longer.

“Corporations seeking to anticipate extra sustained stability could should be affected person for a very long time,” stated Meghan Graper, world co-head of funding grade syndicate at Barclays.

STANDING DOWN

Even so, the provision of latest high-grade bonds has shrunk, with September issuance volumes to date on monitor to make it the bottom for the month in a decade, based on information supplier Informa World Markets.

That has hit the provision of excellent high quality property simply when buyers want extra protected locations to cover. It will additionally eat into charges for Wall Road banks.

Natalie Trevithick, head of funding grade credit score at Payden & Rygel, a fund supervisor, stated buyers have been searching for increased high quality issuers whilst “a lot of issuers have been standing down from the markets.” “What we’ve seen is a shift to shorter-dated financing,” Trevithick stated.

Earlier this 12 months, Oracle Corp, for instance, was broadly anticipated by bankers, analysts and strategists to situation $20 billion value of bonds to fund its acquisition of healthcare IT agency Cerner Corp.

The $28.2 billion deal closed in June. Sometimes corporations take a bridge mortgage to fund mergers however then pay it down with a long-dated bond situation earlier than closing.

Oracle as an alternative drew down $15.7 billion from a one-year bridge mortgage and took out time period loans value $4.4 billion with three 12 months and 5 12 months maturities that could possibly be pay as you go early to refinance the bridge mortgage.

The tech big additionally doubled the scale of its business paper program to $6 billion and stated that it might increase the scale of the time period mortgage to $6 billion.

Extra not too long ago, Adobe Inc stated it is going to fund its $20 billion acquisition of cloud-based designer platform Figma with inventory and money readily available, throwing in a time period mortgage if essential.

Reuters couldn’t decide Oracle’s and Adobe’s rationale behind their funding selections, however bankers stated their actions have been proof of the broader pattern.

An Adobe spokesperson stated the corporate was capable of finance the deal given its money movement. “If a time period mortgage is critical as a result of timing of the deal closing, we anticipate to pay it again shortly,” the corporate stated.

Oracle didn’t reply to requests for remark.

SHORT-TERM DEBT

Bond syndicate desks had estimated, primarily based on their visibility of the issuance pipeline, that September would see as a lot as $150 billion of latest bond provide, however as of Wednesday solely $73.65 billion has made it to the first markets, based on Informa information.

Of these, almost 43% of all new high-grade bonds priced in September carried maturities as much as 5 years in comparison with round 32% in August and 28% in September final 12 months, the information confirmed. This has occurred whilst two-year and five-year Treasury yields jumped throughout the month, elevating the price of short-term debt.

To make certain, not all corporations can afford to attend for higher funding situations. Out there for junk bonds, for instance, some corporations are paying increased charges to boost funds. Stronger corporations, nevertheless, have extra selection and are coming off a interval of bingeing on debt.

“In order that they have the choice within the present surroundings of upper absolute coupons, in comparison with that of the final decade, to attend or have a look at different near-term funding choices,” stated Brian Cogliandro, worldwide head of syndicate at MUFG.

(Reporting by Shankar Ramakrishnan and Matt Tracy; modifying by Paritosh Bansal and Deepa Babington)