Exxon's $12 Billion Bond Deal Doesn't Make 2016 Any Sweeter

  • Signs that demand for U.S. corporate bonds is waning
  • Total issuance down about 3% from first 2 months of 2015

Investors are finding fewer and fewer companies to love in the corporate bond market.

Exxon Mobil Corp sold $12 billion of debt on Monday, in one of the biggest deals of the year. But there are plenty of signs that demand for corporate debt is waning after investors have spent the past six years gorging on the stuff. 

There have been just 337 bond sales this year, the weakest start to a year in at least a decade by number of deals, data compiled by Bloomberg show. In the last 12 months, there have been more than 75 days when companies sold less than $100 million of debt, a dry spell worse than any of the rolling 12-month periods during and after the 2008 financial crisis, according to Citigroup Inc. debt strategists. 

"Investor skittishness has spread from the trouble spots to the broader market," Stephen Antczak, Citigroup’s head of credit strategy wrote in a note. 

It could be worse for corporate bond issuers. Total sales for the first two months in dollar terms were still higher than the same period in 2014.

But total issuance figures are down about 3 percent from the same period in 2015. And the results would be worse if not for a few outsized deals from companies that investors view as safe, like Exxon Mobil, or brewer Anheuser-Busch InBev NV, which sold $46 billion of bonds in January. The beer deal alone accounts for about 17 percent of issuance so far this year.  

For many junk-rated companies, sales of any size are out of reach, and the corporate bond markets are essentially closed. Junk bond issuance so far this year is down more than 60 percent from the same period last year, and is at its lowest level since 2009, when the economy was still hobbled by the financial crisis.

The weaker appetite for company debt doesn’t bode well for corporations who are still looking to fund as much as $1.1 trillion in mergers that are expected to close this year, according to Bloomberg data.

Demanding Investors

"Investors are very demanding and they want higher quality," said Timothy Doubek, who helps manage $26 billion in corporate debt at Columbia Threadneedle Investments.

It’s the latest sign of how investors are becoming increasingly alarmed about the potential that slowing global economic growth will crimp corporate earnings, giving them less money to pay bills. U.S. corporate bonds are off to their worst start on a total return basis in three years, according to Bank of America Merrill Lynch Indexes.

Central bankers are concerned too. China’s central bank cut the required reserves for lenders this week, a way to expand the money supply. The nation joins Europe, Japan, and others that are trying to stimulate their economies by expanding the money supply. 

Another Wave

As bad as it is for issuers, borrowing costs for investment-grade rated companies are still only about one percentage point higher than the record lows reached in 2013. Much depends on the direction of stocks, said Dan Fuss, vice chairman of Boston-based Loomis Sayles & Co., in an interview on Monday.

"If the stock market recovery continues, then you are very likely to see another wave of demand for good protected, investment-grade corporates," Fuss said.

Some analysts are bullish on the outlook for debt sales. Bank of America Corp. strategists wrote in a note on Tuesday that borrowers could sell between $120 billion and $140 billion of investment-grade bonds in March, as risk appetite returns to the market and companies look to raise money.

"We look for the pace of supply to accelerate from February as March is seasonally the busiest month of the year," Bank of America analyst Yuriy Shchuchinov wrote in a report.
"The significant pipeline of announced M&A deals with potential funding needs in the high grade bond market could continue supporting volumes."

For now, many companies are having trouble selling debt at affordable levels. 

"The only companies that have been able to come to market by and large have been investment grade issuers and more specifically, single-A and better," said Jody Lurie, credit analyst at Janney Montgomery Scott.

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