It turns out that bond investors do occasionally put down their collective foot and refuse to be cash registers for big companies.
Just such a moment came late Wednesday, when Charter Communications Inc. withdrew a planned $1.5 billion bond sale, citing "market conditions." The reality is the telecommunications company wanted to borrow money at rock-bottom rates and use the proceeds to buy back shares but dropped its plan when bond buyers pushed back the tiniest bit.
To be fair, this week has been a bit weaker for lower-rated corporate debt, largely because of lower energy prices that have pressured leveraged oil and gas drillers. But money is still relatively cheap. Borrowing costs for risky companies outside of the energy sector rose by a mere 0.10 percentage point in the past week, to 5.38 percent, compared with the decade-long average of 6.7 percent. Yields on Charter bonds are still near record lows.
Charter's spokesman, Justin Venech, chalked up this bond-sale cancellation as a display of corporate responsibility. "We are price-disciplined, and this was opportunistic," he told Bloomberg News.
There are a few lessons in this. First, it suggests that Charter, like many companies, has been utterly spoiled by ultra easy monetary conditions, which have suppressed yields near record lows. If yields aren't perfect, borrowers can simply wait for a better time, which is nearly inevitable.
Second, it highlights how corporations are borrowing cash they don't need and will most likely be much more expensive to refinance in the future. U.S. corporate bond sales are near a record for the first half of the year. When (and if) borrowing costs do rise eventually, it will lead to pain for these companies that would have been entirely avoidable.
And third, it shows how companies have had the upper hand this year when dealing with bond investors. Many fund managers know they are getting a raw deal and go for it anyway. They don't expect to make a killing, but they have money and need to put it somewhere. They'll lose on an inflation-adjusted basis if they park their cash in a money-market account, buy they're often insufficiently compensated for the risk they're often forced to take in the corporate credit market.
This imbalance will most likely continue for much longer than most investors would like. While the Federal Reserve is slowly tightening the monetary screws, Japanese and European central bankers are still buying assets and keeping short-term rates at record lows. No one seems overly worried about runaway inflation. Bonds have continued to rally.
Companies are fully aware of this dynamic. That's why a borrower like Charter is more than happy to wait out a rough patch. Even if bond investors balk on occasion, they'll probably return to being cash registers for corporate borrowers in short order. It's nice to see investors put up some resistance. In all likelihood, such restraint won't last.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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