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Corporate funding markets appear to be thawing as finance chiefs at a number of highly rated companies face a year-end deadline decision: Refinance near-term debt coming due with bonds at higher rates now or turn to shorter-term options on the chance rates might be lower in the new year.
Many investment grade-rated businesses spent parts of 2020 and last year buying back older, more expensive debt and selling long-dated bonds with low coupon rates, often going out 10, 20 and even 30 years. But not all companies refinanced early, with some uncertain about where rates would go and others shying away from paying the extra fees associated with tendering their debt ahead of schedule.
Since then, the Federal Reserve has raised its short-term benchmark federal-funds rate six times, to a range of 3.75% to 4%, and signaled to markets that more hikes are coming—albeit at a potentially slower pace, Fed Chairman
said Wednesday. What’s more, volatile markets have resulted in fewer opportunities for companies to sell their debt.
Investment-grade U.S. companies have between $550 billion and $750 billion coming due per year from 2023 through 2027, according to
Goldman Sachs Group Inc.,
with about $59 billion left to pay off or refinance in 2022.
“On the company side, there are only two or three weeks left in the year to go to the market,” said Anna Pinedo, co-leader of the capital-markets practice at law firm Mayer Brown. “Otherwise, companies might have to wait until the new year.”
Overall, bond issuance by U.S. highly rated, nonfinancial companies has been substantially lower this year than in previous years, according to data provider Dealogic. These companies sold $615.54 billion in bonds to investors through Tuesday, down from $822.26 billion during the prior year period, according to Dealogic. Of the $615.54 billion, $504.31 billion were new issuances, compared to $111.23 billion in refinancings, Dealogic said.
But investor demand for bonds has been stronger in recent days, leading
and others with near-term debt coming due to the market. Amazon has a $1 billion 2.4% bond maturing in February 2023, followed by two others that year, according to data provider S&P Global Market Intelligence. The online retailer said the 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 repay coming maturities.
on Nov. 22 closed a sale of $1.15 billion in senior unsecured notes, at coupon rates of 5.9%, 5.95% and 6.3%. The online marketplace operator has maturities in January, according to S&P Global.
“Companies tend to refinance several months in advance of maturities, so very rarely get ‘stuck’ having to refinance into a very weak market,” said
co-head of the global financing group at Goldman Sachs.
Still, those deals are often coming at a higher cost.
the Louisville, Ky.-based life insurance provider, late last month sold $1.25 billion in senior notes with coupon rates of 5.75% and 5.875% that mature in 2028 and 2033. The company said it would use the net proceeds to repay senior notes with coupon rates of 2.9% and 3.15%, both due this year. Humana declined to comment.
“In this current rate environment, we find that most deals priced prior to recent rate hikes are naturally refinancing at moderately higher overall rates,” said Siamak Saidi, a managing director in
& Co.’s commercial banking business.
the Parsippany, N.J.-based maker of veterinary drugs, in early November placed $1.35 billion in senior notes—at coupon rates of 5.4% and 5.6%—to finance a maturity in February with a lower coupon rate of 3.25%.
the company’s chief financial officer, said he had monitored bond markets for months and saw yields moving around but decided “to see where things settle out” given the company’s financial flexibility. Pointing to the company’s cash holdings of $2.51 billion as of Sept. 30, Mr. Joseph said Zoetis would have been able to pay back its maturity in cash if necessary.
With tight spreads and orders from investors in excess of what the company offered, Mr. Joseph said Zoetis found the right time to raise funds in the bond markets, even if it meant offering more than in 2013, when the $1.35 billion bond that is up was first sold to investors.
Corporate bankers say that for investment-grade-rated businesses, there is limited benefit now to refinance a maturity more than a year out as interest rates have gone up and spreads have widened. For many highly rated businesses, an increase in funding costs for a bond by 2% to 3% is manageable, bankers say, whereas for high-yield businesses, that could spell trouble.
Among the businesses that recently took out bond debt at a higher cost is retail giant
The company, which has several 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 can include repayment, refinancing or replacement of maturing debt.
However, some companies are deciding to hold on and tap the commercial paper or term loan markets instead, bankers said. With certain investors expecting the Fed to stop raising rates sometime next year—and some even betting on rates to fall, as the U.S. potentially goes through a recession—companies could gain from waiting.
Conagra Brands Inc.,
a Chicago-based food maker, earlier this year took out a term loan because that was cheaper than going to the bond markets, CFO
said. “The term loan really covered this fiscal year,” he said. “We don’t have any significant maturities that we have to start thinking about until fiscal ’24, which gets into later calendar year 2023.”
Mondelez International Inc.,
the company behind Oreo cookies and other snacks brands, in September sold $500 million in bonds at a 4.25% rate, after tapping the market in March for the same amount, but at a 2.125% coupon rate.
Going forward, the company plans to rely on commercial paper if needed, finance chief
said. “For potential seasonality of the business, we are going to take on commercial paper for the most part and we will be able to refinance short duration debt and take advantage of interest costs coming down as to when that happens,” Mr. Zaramella said.
Write to Nina Trentmann at [email protected]
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