Animal Spirits Rekindled with Debt-Fueled Growth

U.S. companies are turning more to the bond market to fund expansions than at any time since 2008, a sign businesses are finally showing some confidence in the economy after hoarding cash for the past five years.

Of the $1.27 trillion of investment-grade bonds issued in the first nine months of the year, companies such as American Transmission Systems Co. and CF Industries Holdings Inc. earmarked as much as 16 percent for capital spending, according to data compiled by Moody's Analytics and Bloomberg. That compares with 9 percent during the same period in 2013. Companies have invested $900 billion in their businesses this year, a 52 percent increase from 2009, Moody's data show.

Corporate executives are providing one of the most bullish signals yet that growth in the world's biggest economy can be sustained. That's in contrast to the first years after the financial crisis, when the vast majority of offerings went to refinance existing obligations as the Federal Reserve's unprecedented stimulus efforts pushed borrowing costs to record lows.

“Animal spirits are finally coming back to life,” said Mark Zandi, chief economist for Moody's Analytics. “Businesses have been reticent to take a chance.”

For the second straight quarter, non-financial companies in the U.S. are spending more on new projects than they're generating from earnings, according to Standard & Poor's. That leaves them funding the gap by tapping debt markets, S&P analyst Diane Vazza wrote in an Oct. 30 report.

“Our dialogue with corporate clients around capex is as robust as it's ever been,” said Amery Dunn, the New York-based managing director of U.S. debt capital markets at Royal Bank of Canada. “There's an uptick in confidence and companies are feeling better as we get further and further away from the crisis.”

An index that Zandi created to gauge the morale of company executives is close to the highest level since the start of 2003. Manufacturing growth based on the Institute for Supply Management's factory index expanded at a faster pace last month to match August as the highest since March 2011, the Tempe, Arizona-based ISM said in a report yesterday.

Building Plants

American Transmission Systems, which said in a 2014 report that it expects to make as much as $3.9 billion of improvements to its electrical grid during the next 10 years, issued $400 million of bonds last month for capital expenditures, Bloomberg data show. Anne Spaltholz, a spokeswoman for the Pewaukee, Wisconsin-based company, didn't respond to telephone messages seeking comment.

CF Industries, a 68-year-old company that uses natural gas to create nitrogen plant fertilizers, doubled its debt load by issuing $1.5 billion of bonds in March to help fund its biggest expansion ever.

With natural-gas prices declining during the last several years amid the U.S. shale boom, the Deerfield, Illinois-based company embarked on a $3.8 billion plan to expand fertilizer production, including a $1.7 billion plant in Iowa, said Dennis Kelleher, the company's chief financial officer.

“We can run those plants flat out” with natural gas prices so low, Kelleher said in a telephone interview. While the company doesn't have plans for more debt offerings in the near future, “it wouldn't be surprising if we took a look at debt capacity” once earnings start to climb, he said.

U.S. companies are coming into this shift with some of the strongest balance sheets in decades after taking advantage of record-low borrowing costs. Average corporate-bond yields of 3.8 percent are below the 10-year average of 5.62 percent and down from as high as 11.1 percent at the peak of the crisis in 2008, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.

Companies in the S&P 500 Index have about the lowest net debt to earnings ratio in at least 24 years and record earnings per share, Bloomberg data show. They are headed this year toward the fastest average monthly job creation since 1999, a recovery that stands in contrast to Europe and Asia.

Even as investment-grade companies are increasing their borrowing for capital projects, speculative-rated firms have kept their share of bond deals for capital expenditures steady at about 15 percent, according to Moody's Analytics data. Instead, they've largely been pursuing shareholder friendly activities funded by debt, according to an Oct. 28 Moody's Investors Service report.

Waste Investments

“It's not clear at this point if this is a meaningful inflection point yet,” Ward McCarthy, chief financial economist at Jefferies LLC, said in a telephone interview.

Quasar Energy Group, a closely held company in Cleveland that builds and operates projects that reduce the cost of waste disposal, is boosting its direct investment to about $250 million through 2020 from about $70 million on projects to date, predicting it will win about $1 billion of work during the period.

Municipalities had stopped investing in wastewater upgrades and expansions during the recession, creating “a market that is crying out for help,” said Chief Financial Officer Steve Smith. Quasar uses microorganisms to break down waste while producing biogas that's turned into energy.

“The rubber is starting to hit the road,” Atul Lele, chief investment officer of Deltec Bank & Trust Ltd., said in a telephone interview. “This is the single most bullish part of the U.S. economy over the next year.”

Bloomberg News

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