US companies have been rushing to borrow on the bond market in anticipation of a possible fallout from the debt ceiling dispute.
According to Dealogic data, highly rated companies issued bonds totaling $112bn this month. This is up from $46bn sold in May 2022, and more than three times the amount of April. Except for 2020, where ultra-low rates caused a borrowing frenzy of $196bn, the May corporate issuance in this year is highest since seven years.
Bankers who deal with corporate bonds say that borrowers are taking advantage of the relatively buoyant markets to attract investors before the US government runs out of cash, which could cause a spike in volatility.
Richard Zogheb is the head of Citi’s global debt capital market.
He added that the deals were a result of “a combination of trying to avoid the absurdity of the debt ceiling while also taking advantage of a good market”. Market participants say that broader concerns about the economy also influence timing decisions. The Federal Reserve has raised interest rate in the last 14 months from a near-zero level to a range of 5 to 5,25 per cent. This has heightened fears that the US economy is entering a recession.
Zogheb stated that the “acceleration has been people who planned to access the market relatively soon-to-medium-term”, and said instead “we’ll go now. . . We might as well just avoid the whole thing'”.
The dispute over the US federal debt limit has intensified in recent weeks. Treasury Secretary Janet Yellen warned that it could be as early as June 1 before the x-date, the moment when the government runs out and risks defaulting.
A prolonged impasse, however, could cause broader disruptions to the transactional market. While it is expected that the government will avoid defaulting, as would happen if they failed to make payments scheduled to investors who hold Treasury Bonds. The $24tn Treasury Market is considered the safest and deepest in the world. It is used to set the prices of other assets around the globe.
US investment-grade bonds yields, which reflect borrowing costs, are now below 5.5%. They have fallen from a high of 5.71 percent during the March banking sector turmoil and are below their previous autumn’s peak of over 6%. The spreads, or the premium companies charge their investors for Treasury bonds, have remained largely unchanged this month. “I think the combination of Treasuries at an acceptable yield for corporates, coupled with the potential that there could be dislocations in the market over the summer with respect to the debt ceiling, made it almost a no-brainer for companies to accelerate things,” said Teddy Hodgson, co-head of global investment-grade syndicate at Morgan Stanley.
Dan Mead is the head of Bank of America Securities’ investment-grade syndicate. He said that issuers have been pulling forward financings in order to take advantage of favorable market conditions. Companies are “aware that there is a lot event risk in the market”.
This is a result of a combination between the Federal Reserve, the debt ceiling and economic concerns.
After a strong February, March and April are usually weaker months for issuing.
Dealogic data show that 56 companies priced US investment-grade bond deals in the month of May. More than two thirds of the proceeds were used for acquisition financing, the highest percentage since December 2021. Pfizer, the pharma group, launched a $31bn bond issue on Tuesday to fund Seagen’s acquisition. One market participant who did not wish to be named suggested that Pfizer, oil and gas group Ovintiv and sub-investment-grade life science company Iqvia were among borrowers whose bond sales this week had come slightly earlier than the market had anticipated.
Pfizer Ovintiv and Iqvia have not responded to our requests for comments.
Analysts and bankers have pointed out that low-rated, high-yield companies are more concerned with credit conditions and their risk appetite, rather than macroeconomic factors like the debt ceiling. They also tend to use capital markets less often than investment-grade companies.
Maureen O’Connor is the global head of Wells Fargo’s high-grade bond syndicate. She says that “economic uncertainty, in the form classic recessionary headwinds, was what pushed issuers to act earlier in the year.” The debt ceiling, coming up soon, has likely added fuel to the fire. This is why there was so much activity in May.
Citi’s Zogheb stated that a more favorable backdrop encouraged issuers this week to borrow, “especially as news spread that they [in Washington] are negotiating and that things were moving in a positive direction”. “If we make it through the weekend, and they claim we’ve made a huge step back, we will definitely see volatility.” “We might see companies take a step back.”
O’Connor said that the investment grade market in the US was “incredibly resilient”, and “for the correct names, there will be an audience”.
She said: “I try preaching some calm to those who are concerned that the Debt Ceiling debate will be a ‘lights-out’ for our markets,” because it is not.