US companies are rushing to borrow money in the bond market, bringing forward deals in case the country’s debt ceiling stand-off causes turmoil over the summer.
Highly rated companies have issued bonds worth $112bn so far this month, according to data from Dealogic, up from $46bn in May 2022 and more than triple the amount sold in April. Excluding 2020, when ultra-low interest rates sparked a $196bn borrowing frenzy, May corporate issuance this year is the highest in seven years.
Bankers who handle corporate bond deals say borrowers are making the most of a relatively buoyant market environment to tap investors now before any possible volatility erupts from the US government running out of cash — a scenario that could have cascading implications for global asset prices.
“It’s fair to say that there’s been some acceleration” in issuance, said Richard Zogheb, head of global debt capital markets at Citi.
Deals that had been pulled forward reflect “a combination of ‘let’s avoid the nonsense of the debt ceiling and let’s take advantage of what’s a pretty good market’”, he added.
Broader worries about the economy are also playing into decision-making around timings, according to market participants. With the Federal Reserve raising interest rates from near zero to a target range of 5 to 5.25 per cent in 14 months, fears have intensified about the US entering a downturn.
Zogheb said that “the acceleration has been folks who were planning to access the market in the relatively near- to medium-term”, in June or July, and instead said “‘we’ll just go now . . . we might as well avoid this whole issue’”.
The stand-off over the US federal borrowing limit has heated up in recent weeks, with Treasury secretary Janet Yellen warning that the so-called x-date — the moment at which the government runs out of money and risks defaulting on its debt — could come as soon as June 1.
While the government is widely expected to avoid default, which would occur if it failed to make scheduled payments to investors holding Treasury bonds, a drawn out impasse could disrupt broader transactional activity. The $24tn Treasury market is viewed as the deepest and safest in the world, and is referenced globally to determine the price of many other assets.
US investment-grade bond yields — reflecting borrowing costs — now hover below 5.5 per cent, down from a peak of 5.71 per cent during the banking sector ructions of March, and sit below highs last autumn of more than 6 per cent. Spreads, meaning the premium that companies pay their investors over Treasury bonds, have been broadly steady 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.
“We have seen issuers pulling forward financings to take advantage of favourable market conditions,” said Dan Mead, head of the investment-grade syndicate at Bank of America Securities. But companies are also “cognisant that there’s a lot of event risk out there”.
“There’s a combination of the debt ceiling, the Federal Reserve and concerns around the economy” driving this.
May is often a stronger month for issuance, and March and April were weaker after a big February.
Still, 56 companies have priced investment-grade US bond deals in May, Dealogic data shows, with more than two-thirds of the proceeds earmarked primarily for acquisition financing — the highest proportion since December 2021. Pharma group Pfizer on Tuesday launched a jumbo-sized $31bn bond sale, implemented to help fund its purchase of Seagen.
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 did not respond to requests for comment.
Bankers and analysts pointed out that high-yield, lowly rated companies were generally more focused on credit conditions and risk appetite than macroeconomic factors such as the debt ceiling, and tend to tap capital markets less frequently than their investment-grade counterparts.
For Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo, “economic uncertainty in the form of classic recessionary headwinds is what’s pushing issuers earlier in the year. And then the debt ceiling more imminently has probably thrown gasoline on that fire, which is why we’re seeing so much volume in May.”
Citi’s Zogheb said that a more positive backdrop had encouraged issuers to borrow this week, “particularly as news came that they [in Washington] were negotiating and things were moving in the right direction”. However, “if we get through the weekend and they say we’ve taken a big step back — we could definitely see volatility. We might see companies step back.”
O’Connor maintained that the investment-grade market in the US is “incredibly resilient” and “for the right names, there will always be an audience”.
“I try to preach some calm to those concerned that the debt ceiling debate is going to be ‘lights out’ for our market,” she said, “because it’s just not.”