Capital Markets

Bonds Are Booming, for Now

In September, companies issued investment-grade debt at levels not seen for three years. But beware year-end softening.
Roy HarrisOctober 1, 2010

Companies sold investment-grade bonds in September at the highest monthly level since May 2008, and they are expected to supply investors with a continued flow of issues — at least for another month or two.

Led by 5 offerings in the range of $3 billion to $5 billion and 8 more just short of $2 billion, the 130 corporate issues brought proceeds of $107.7 billion, according to Thomson Reuters. That marked a jump from 79 issues for $70.8 billion in August, and was more than double July’s totals in both number of issues and proceeds. The top 25 corporate offerings in September all exceeded $1.2 billion.

September frequently is a second-half peak for investment-grade corporate-debt issuance. The 98 total issues in the year-ago month, bringing in $77.3 billion, was a fairly typical spike, featuring the traditional post-Labor Day activity, with monthly proceed totals then falling off until a rise in January 2010.

Three giant issues in September’s final days helped this year’s rally, with NBC Universal, Microsoft, and BP weighing in late with offerings of more than $3.5 billion. In the case of BP’s $3.5 billion sale, strong demand led the company to increase its offering from its expected $2 billion to $3 billion level, according to some reports.

The year-to-date total of 619 investment-grade corporate-debt issues, up from 581 through September 2009, is still half the number of offerings for the January-to-September period of 2007. That year was the fifth straight in which more than 1,000 corporate issues came to market in the first three quarters. But in terms of companies selling bonds on a monthly basis going back three years, only those May 2008 numbers — 138 issues, raising $153.3 billion — topped this just-completed month.

September Bonds

“What’s really driving this healthy market now is the historically low rates, making for tremendous demand for investment grade,” Williams Capital Group’s head of fixed-income sales and trading, David Coard, tells CFO. His reading is that bond buyers grew tired of the low yields on Treasuries, but still feared the risk of high-yield issues.

“If you look at the rest of the year, I’m still not clear,” says Coard. “Corporations are flush with cash [but] I think they’re being opportunistic because rates are so low.” Investment-grade corporate-debt issuance “will keep going in October and November, but I don’t know if it will stay at this level. In December things usually dry up anyway because we’re into the holiday season.”

Ron D’Vari, CEO of investment banking services company NewOak Capital, cites a couple of other reasons for the recent popularity of corporate-debt issues. “A lot of balance-sheet repair has been going on. If you’re a company, you don’t want to go to market in your pajamas, but rather in a tuxedo,” he says. So staff reductions, stabilized run rates, and other rationalizing activity paved the way for this move to the market.

“If you’re a CFO, you tend to sniff around to see if you came to the market, would people bite,” adds D’Vari. And insurance companies, pension funds, and other institutional buyers seemed hungry, in part, because competing product classes such as mortgage-backed securities and asset-backed securities “went away.” Also, for corporate bonds “the spreads look relatively attractive compared to other forms of financing.”

Those buyers tend to stay hungry in the fall, he says, because “we’re getting to the magic period of the year-end for broker-dealers,” when their compensation is “measured by volume.”

Yields for investment-grade bonds were 4.9%, with high-yield debt returning an average 6.5% and Treasuries 2.7% on the Bank of America Merrill Lynch quarterly indexes, while the Dow Jones Industrial Average was gaining 10.4%. (The Dow is up less than 3.5% for all of 2010 so far.)

Concerns about the economic outlook, though, could move investors out of corporate bonds and toward government securities — and lead companies to soften their level of offerings. Coard at Williams Capital, for example, is “bullish on Treasuries, because I think the economy is vulnerable to a double-dip recession.”

D’Vari, though, isn’t forecasting corporate-debt-issue prospects for next year’s first quarter. “That question,” he says, “is better addressed to [Fed chairman Ben] Bernanke than me.”