U.S. Companies Rush to Bond Market to Refinance Commercial Paper
With the market for short-term corporate debt seizing up in the U.S., companies turned back to the bond market to raise cash.
(Bloomberg) --
With the market for short-term corporate debt seizing up in the U.S., some of the world’s biggest companies, including Exxon Mobil Corp. and PepsiCo Inc., turned back to the bond market to raise cash on Tuesday.
In a sign of just how badly financial markets have been thrown out of whack by the coronavirus outbreak, yields on normally ultra-safe corporate debt maturing in as little as 30 days -- known as commercial paper -- have been surging faster than yields on bonds maturing in 10 years or more.
The Federal Reserve announced steps to try to unlock the commercial paper market, but some borrowers opted not to wait for that to happen. Exxon led the day with an $8.5 billion sale, while Pepsi borrowed $6.5 billion.
Many of the issuers Tuesday were planning to use the debt proceeds to refinance their commercial paper, which companies rely on to cover short-term financing needs like payroll.
Usually it’s cheaper for companies to borrow in short-term markets rather than issuing longer-maturity bonds. But the nearer-term risk of recession and rising defaults have cast doubt on some companies’ ability to finance day-to-day operations. Companies have issued less commercial paper as a result and have often resorted to drawing down credit lines instead.
“There’s definitely issues in the commercial paper market, and these companies are going to hit the bond market to shore up their financing,” said Daniel Oh, a portfolio manager at Osterweis Capital Management.
The Fed will reintroduce the Commercial Paper Funding Facility, a measure from the financial crisis to shore up short-term funding markets, according to a statement Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund. The Fed rolled out the facility in 2008 as global credit markets seized up.
“By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period,” Treasury Secretary Steven Mnuchin said in a separate statement.
Verizon Communications Inc. led the charge of almost a dozen frequent and high-quality U.S. investment-grade issuers Tuesday that managed to sell $27.6 billion of debt. They were the first to do so since Friday.
Read more: IG ANALYSIS US: Exxon, Verizon, PepsiCo Lead Biggest Day of 2020
Europe’s market also rebooted, starting with three covered deals, among the safest of offerings due to their asset coverage. However, one of the initial borrowers later chose to stand down, citing “adverse market conditions.”
Primary markets have been mostly shut in the last few weeks as the coronavirus outbreak has amplified risk premiums and tips the economy closer to recession. In the U.S., investment-grade spreads have nearly doubled in less than two weeks, and the high-yield market hasn’t had a deal price since March 4.
Elsewhere in global credit markets today:
U.S.
Investment-grade and high-yield credit-default swaps indexes improved as Wall Street stocks rallied after the U.S. government stepped up its efforts to offset the financial damage caused by the coronavirus. Treasuries slumped.
- Investment-grade bond spreads ended the day at the highest since 2009 at 255 basis points, versus 242 basis points Monday despite the risk-on rally in other assets, while high-yield spreads are now at the widest since 2011 at 846 basis points, up from 827 basis points yesterday
- High-yield bond spreads have to blow through 1,000 basis points before there’s a buying opportunity, according to Oksana Aronov, head of market strategy for absolute return fixed income at JPMorgan Asset Management
- The cost to protect against a default by Boeing surged to the highest level on record as the planemaker was said to have asked White House and Congressional officials for short-term aid for itself, suppliers and airlines
- S&P says the default rate on non-financial corporates in the U.S. may rise above 10% and into the high single digits in Europe over the next 12 months
- More than 30 power and energy companies are in talks with banks to discuss raising new financing or drawing down on their existing loan facilities
Europe
The earlier positive tone was enough to tempt a trio of borrowers to open sales of new top-rated covered bonds, which are among the safest of debt securities because they’re backed by ring-fenced assets, usually mortgages. However, TD Bank later stood down, citing market conditions.
- Royal Bank of Canada offered 1 billion euros ($1.1 billion) of covered bonds due in five years at 40 basis points above midswaps after failing to tighten pricing from an opening target
- TD Bank and Canadian Imperial Bank of Commerce had both opened books on floating-rate sterling sales, with TD eventually deciding to postpone its sterling sale
- The coronavirus is putting Europe’s banks under the kind of systemic pressure last seen during the 2012 euro zone debt crisis
- Euro high-grade bond spreads closed 10bps higher Monday at 191 and the highest since September 2012
- Almost three-quarters of euro IG company bonds are indicated at their lowest level in a year, data compiled by Bloomberg show
Euro high-grade company bond yields have nearly quadrupled in three weeks and now stand at about 1.26% and the most since January 2019
Read more: European Stocks Whipsaw on Virus Woe, Travel Shares Tumble Again
Asia
Currency declines are exacerbating problems for lower-rated companies, with a 4% drop in the Indian rupee versus the dollar in the last month threatening to increase debt servicing costs for companies that face a record $7.5 billion of overseas bonds and loan repayments from April-June.
- Spreads on Asia dollar bonds were about 5-20 basis points wider on Tuesday morning, with wide bid-offer spreads, according to a trader. That leaves spreads set to reach their highest in more than eight years, according to a Bloomberg Barclays index
- Still, the Markit iTraxx Asia ex-Japan index of credit-default swaps fell about 6.5 basis points to about 137, according to traders, easing from its highest level since 2016, according to data compiled by Bloomberg
- Korea Development Bank extended funds to three low-cost carriers: Tway Air, Air Seoul and Air Busan
- Australian funding markets remain stressed even as the country’s central bank pours record amounts of liquidity into the system. The three-month bank bill-OIS spread is holding at levels last seen a year ago amid the trade war
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