U.S. Companies to Move Bond Sales Forward If Rates Rally
According to a Bank of America analysis, U.S. blue-chip debt will be “an attractive asset class” if interest rates continue to rise, and “the markets are open.”
An improving interest rate environment could motivate U.S. blue-chip companies in the second half of 2023 to execute bond sales that they initially slated for next year, according to Bank of America Corp. (BofA).
The Federal Reserve on Wednesday raised interest rates to the highest level in 22 years, and Chair Jerome Powell said the central bank hasn’t made a decision to hike at every other meeting, bolstering bets the central bank will skip a rate increase in September.
U.S. government bond yields narrowed across most of the curve following the Fed’s decision, with the two-year falling 4 basis points (bps) to 4.84 percent. A rally in interest rates, which offers companies the chance to sell debt at more favorable levels, could lead to an uptick in corporate bond sales in the second half of the year, according to Dan Mead, head of the investment grade syndicate at BofA, the biggest underwriter of U.S. high-grade bonds this year, according to data compiled by Bloomberg.
“If we were to see a move in rates similar to what we witnessed in the earlier part of this year, perhaps we may see more corporate issuers in particular looking to pull forward financing,” said New York-based Mead in an interview.
Corporations outside of the financial sector have dominated the high-grade primary market this year, raising 57 percent of the $759 billion that’s priced through July 24, according to a Bloomberg News analysis. Meanwhile, financial institutions have contributed 41 percent of the issuance in the same period.
Mead, who joined BofA in 1994 and was chosen to head the high-grade syndicate desk in 2016, is anticipating a fairly active sales calendar through the first week of August as companies report earnings, freeing them up to potentially issue new bonds. He expects full-year high-grade issuance to be down modestly as corporations have been more active in the first half than expected.
“Issuers in a position to issue post-earnings will have their first window to look,” said Mead. “I don’t think September is going to be abnormally busy, which is consistent with our view on the second half of the year. We are anticipating it to be quieter.”
New high-grade bonds have been well bid this year as investors continue to pour cash into the asset class, with deals 3.4 times oversubscribed on average this year through July 24, the Bloomberg News analysis shows. That compares with three times on average in 2022.
Risk premiums on the bonds, or the added premium over Treasuries investors that get paid to hold the riskier debt, have tightened to 118 bps through Wednesday. That’s 45 bps tighter from this year’s peak during the banking crisis in March. A growing comfort around where the Fed cycle stands and a “very healthy” technical backdrop are boosting investor demand for new deals, said Mead.
“You pick up a credit spread in addition to the Treasury in investment grade and investors are looking at it on a risk-adjusted basis,” said Mead. “It’s an attractive asset class, and markets are in a very healthy place right now, so the markets are open.”
M&A Financing Runway
Wall Street is facing a severe drought in mergers and acquisitions (M&A), with several transactions stuck because of wrangling over valuations or regulatory hurdles. Companies often tap bond markets to finance the transactions.
Broadcom Inc. is moving closer to selling a potential jumbo high-grade bond after scoring approval for its $61 billion acquisition of VMWare Inc. Meanwhile, several governmental hurdles remain for Microsoft Corp.’s proposed $69 billion acquisition of Activision Blizzard Inc., the biggest-ever deal in the world of gaming, though the software giant moved two steps closer to finalizing the deal, winning a court fight with U.S. regulators and an unprecedented reconsideration from the UK.
“Generally speaking, the runway to finance acquisitions tends to be a little bit longer,” said Mead. “So even if we were to see deals announced in the second half, it is unlikely that they would be financed before year end.”
—With assistance from Brian Smith.
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