Companies are on a borrowing binge that’s only accelerating, with investment-grade bond sales poised for a new record year.
No one seems to be too concerned because leverage levels -- debt to a measure of profitability -- are in check, and central banks across the globe are working hard to keep suppressing borrowing costs.
Companies have sold $668.4 billion of high-grade notes in the U.S. this year, 11 percent more than the same period last year and on pace for the biggest annual volume ever, according to data compiled by Bloomberg. Monsanto Co., the world’s largest seed company, is one of the latest to complete its biggest-ever bond deal, selling $4.5 billion of notes yesterday to help fund a share buyback.
Buyers still can’t get enough. Investors are now demanding about the smallest premium over benchmark rates to own the debt since 2007, according to Bank of America Merrill Lynch index data.
They’re gaining confidence from default rates that have plunged far below historic averages. Moody’s Investors Service predicts the global speculative-grade default rate will decline to 2.1 percent at year-end from 2.3 percent in May. Both are less than half the rate’s historical average of 4.7 percent.
Balance sheets are also getting better, with companies improving their profitability faster than they’re borrowing. Gross leverage ratios for the average investment-grade issuer fell to 2.58 times in the first quarter from 2.59 times at the end of the year, according to Morgan Stanley data measuring total debt to earnings before interest, taxes, depreciation and amortization. That’s down from 2.73 times in 2009.
Federal Reserve Chair Janet Yellen is fueling the debt party by making it clear that she’s planning to hold benchmark rates low for a prolonged period.
And even though the amount of outstanding investment-grade bonds in the U.S. has ballooned by almost $1.6 trillion since 2008, some of that growth has stemmed from companies shifting into longer-term bonds and out of shorter-term commercial paper, Barclays Plc strategists led by Jeffrey Meli noted in a report today.
Maybe investors shouldn’t be too complacent because equations will change when benchmark yields rise, making it more costly for companies to borrow.
Also, they’re getting paid less and less to own the bonds. Relative yields fell to 1.06 percentage points more than government-debt rates on June 24, the lowest since July 2007, Bank of America Merrill Lynch index data show.
For now, companies have every reason to borrow because investor demand is insatiable.