Companies are rushing to borrow cheaply while they still can

[NEW YORK] Companies around the globe, concerned that heightened tensions between the US and Iran could roil bond markets, are rushing to borrow cheaply while they still can.

Investment-grade firms have sold more than US$61 billion of notes in the US through Thursday, double the same period in 2019. In Europe, investment-rated and junk bond sales including company and country debt broke a 79 billion euro (S$118.46 billion) weekly record set a year ago. Borrowers from around the Asia-Pacific region sold more than US$28 billion in dollar notes this week, in a record start.

Companies have reasoned that it makes sense to sell bonds now when conditions are still good and demand is strong. If the Iran situation were to worsen and sentiment turn, then borrowers "may end up paying more and demand for riskier assets will wane", said Alex Eventon, a fund manager at Resco Asset Management.

"No matter what comes next conditions are likely to be less good than they are now," Mr Eventon said.

The high volume of US investment-grade bond sales this week could translate to slower activity later in January, which is typically one of the busiest months of the year for borrowing. Wall Street strategists broadly expect bluechip companies to sell around 5 per cent fewer dollar-denominated bonds this year than last year on a gross basis, as they cut their overall debt levels and take advantage of comparatively lower yields in Europe. And in the near term, many companies are close to posting quarterly results, which limits how much debt they can sell for now anyway.

Some of the major issuers this week in the US included American Tower Corp, a company that leases out space on cellphone towers, which sold US$1.5 billion of notes in two parts. Among issuers from the Asia-Pacific, Westpac Banking Corp and Nomura Holdings Inc led a handful of multibillion-dollar deals, with a large swathe of Chinese companies also selling. In Europe, a flood of bank deals materialised, including a 1.25 billion euro sale from Italy's UniCredit SpA.

"Investor demand has been at, or close to, record levels in many instances," said Lee Cumbes, a managing director in debt capital markets at Barclays plc in London.

STRONG DEMAND

That demand is evident globally. In the US, money managers this week put in orders for far more bonds than companies were selling, and yields on new notes are almost equal to companies' existing debt, instead of being higher.

Demand is so strong that even companies with some of the lowest credit ratings, which might have struggled to borrow for much of last year, have been able to tap the market. Transocean Ltd, an offshore oil driller, sold US$750 million of junk bonds on Wednesday. The notes carry a Caa1 rating from Moody's Investors Service, putting them in the lowest tier of debt that companies typically issue. S&P Global Ratings has the securities the equivalent of one step higher at B-.

The reason for the strong issuance levels globally is clear, money managers said.

"As long as the market is open and investors are ready to buy, there's always the potential for more uncertainty out there if you decide to hold off," said Bob Summers, an investment-grade portfolio manager at Neuberger Berman in Chicago. "If a company has all its documentation lined up and ready to go, there's really no reason to wait."

ESCALATION, DE-ESCALATION

Tension between Iran and the US intensified last week after the US killed Qassem Soleimani, a top Iranian general. US President Donald Trump tweeted that Gen Soleimani was planning to kill Americans. Iran vowed revenge, and fired missiles at two US bases in Iraq on Wednesday. The attacks caused no casualties, and Mr Trump on Wednesday appeared to shift away from talk of war. It's unclear if Iran is done with reprisals, but investors are less worried about the conflict, and US stocks are reaching fresh records.

The US investment-grade market is coming off a year with gains of 14.5 per cent, according to Bloomberg Barclays index data, and only six weeks of retail outflows for all of 2019, according to Refinitiv Lipper. Yields are just 2.86 per cent on average, hovering near lows last seen in mid-2016. Risk premiums are near the tightest levels in almost two years.

New notes have traded well in the secondary market so far, a sign that investors still have money to put to work, building on last year's momentum, according to Stacey Starner McAllister, head of investment-grade fixed-income research at Eaton Vance Corp.

"Maybe investors are less concerned about Iran and geopolitical factors than issuers are," she said. "We're always talking about those potential risks, but right now it's not changing our base-case outlook for credit for the year."

BLOOMBERG