IBM Sells $20 Billion of Bonds as Market Defies Trade Drag

(Bloomberg) -- International Business Machines Corp. sold $20 billion of bonds, propelling the corporate-debt market to its busiest week in at least eight months despite turbulence across asset classes worldwide.

The senior unsecured bonds will help fund the computer-services giant’s acquisition of Red Hat Inc. The longest portion of the offering, a 30-year security, will yield 1.45 percentage points more than Treasuries, after initial talk of around 1.55 percentage points, according to a person with knowledge of the matter, who asked not to be identified as the details are private.

The order book for IBM’s eight-part bond sale was just shy of $40 billion, suggesting some investor indigestion following Tuesday’s offering from Bristol-Myers Squibb Co. The drugmaker managed to sell $19 billion of bonds, one of the biggest sales of the year.

The U.S. investment-grade corporate bond market reached record highs on Tuesday, shrugging off the trade war fears that have weighed on stocks and oil this week. High-grade issuance this week could top $40 billion, the most since September, according to data compiled by Bloomberg. High-yield issuers are also taking advantage of the frenzy -- they collectively had their busiest day in three months.

The market turmoil of recent days may be spurring companies that had been waiting for an opportune moment to borrow now, said Lale Topcuoglu, senior fund manager and head of credit at J O Hambro Capital Management. Issuance tends to slow down over the summer, giving limited time for corporations to sell debt.

“If you’ve got to get a deal done and there’s even a little uncertainty about the markets, that’s an additional push,” said Topcuoglu, whose firm manages about $38 billion. “You really have May to crank as much as you can.”

More big bond offerings are coming. T-Mobile US Inc. and Fidelity National Information Services Inc. are expected to issue debt in the coming weeks to fund their respective acquisitions.

Companies are tapping the bond market to finance acquisitions after having shied away from that kind of issuance for much of the year. Just over $60 billion of investment-grade corporate debt was sold for that purpose in the first four months of the year, including about $2 billion in April, according to data compiled by Bloomberg. That’s out of $445.4 billion of total issuance over that period. Companies instead focused on selling bonds to refinance maturing securities and fund capital expenditure, among other corporate uses.

Bond-sale volume linked to acquisitions is increasing now in part because borrowing has grown even cheaper: the average high-grade company bond yielded 3.6% on Tuesday, according to Bloomberg Barclays index data, close to its lowest level since early 2018. The debt has gained 5.9% this year.

Much of the borrowing to fund acquisitions this month has come from companies that announced their purchases last year. With rates low, more corporations may be tempted to boost revenue by buying competitors with borrowed money, said Josh Lohmeier, head of U.S. investment-grade credit at Aviva Investors, which manages more than $420 billion.

“The performance of the bond market year-to-date is definitely going to be encouraging to companies that are considering and contemplating M&A,” Lohmeier said.

Market turmoil has spurred demand for safe-haven Treasuries, and corporate debt sales could lift demand for U.S. government debt as well. When companies sell bonds, they often unwind interest-rate hedges they put in place earlier, resulting in their buying Treasuries or receiving fixed rates in swaps.

Issuers outside the corporate market are finding strong demand too. Russia sold more than $1 billion in ruble-denominated bonds on Wednesday.

Red Hat

The IBM offering started just days after the company received U.S. regulatory approval for its planned $33 billion Red Hat purchase. IBM said it’s working with competition authorities in other jurisdictions -- European Commission clearance is outstanding -- though the company still expects the transaction to close in the second half of this year.

The Red Hat purchase will push the combined company’s borrowings above $60 billion with debt that’s more than three times a key measure of earnings, said Bloomberg Intelligence analysts Robert Schiffman and Mike Campellone. Though IBM won’t buy back shares in the next two years, it still risks a potential downgrade to the BBB range, the tier of corporate debt that’s just above junk, they wrote.

IBM took out a $20 billion bridge loan to fund the Red Hat deal and will use some of its cash pile, the company said in October when the transaction was announced. S&P Global Ratings and Fitch Ratings cut IBM one level to A at the time, the sixth-highest investment-grade rating, while it remains on review for downgrade at Moody’s Investors Service.

The Red Hat acquisition will be the world’s second-largest technology deal ever and boosts IBM’s credentials in the fast-growing and lucrative cloud market. Red Hat gives IBM much-needed potential for real revenue growth, as it has been slow to adopt cloud-related technologies and lagged market leaders Amazon.com Inc. and Microsoft Corp.

BNP Paribas SA, Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. managed the bond sale, the person said.

--With assistance from Joshua Fineman, Elizabeth Stanton, Allan Lopez, Rizal Tupaz and Brian Smith.

To contact the reporters on this story: Molly Smith in New York at msmith604@bloomberg.net;Natalya Doris in New York at ndoris2@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins, Christopher DeReza

©2019 Bloomberg L.P.