HP Collides With Stingy Bond Market: Lisa Abramowicz

(Bloomberg) -- When does a hefty premium turn out to be a bargain?

When you’re Hewlett-Packard, it turns out, and you need to bring a $14.6 billion bond deal to the market. And that does not bode well for other big names that need to borrow money soon.

HP was forced to pay almost half a percentage point more than rates on its existing bonds, as Bloomberg News’s Michelle Davis reported. The California tech company raised the money to split its enterprise unit from its printer and PC business. And while it has faced declining revenues and a shrinking staff, the company is still investment grade.

HP is lucky it didn’t have to pay more. Its new bonds were struggling to keep their value in initial trading, with Brean Capital LLC macro strategist Peter Tchir noting Thursday that the deal was “not doing well.”

This sets a bad precedent for other companies, such as Halliburton and Pfizer, that are hoping to borrow money in the near future.

Investors are already demanding 1.78 percentage points more than benchmark rates to own investment-grade bonds, the most since 2012 and up from 1.06 percentage points in June last year, Bank of America Merrill Lynch index data show.

Bond buyers are jumpy, and it’s easy to understand why. The credit cycle seems to be turning quickly, with the strength of behemoths such as Sprint and Glencore suddenly called into question. Commodities are continuing to slide. The Federal Reserve is planning to raise interest rates at some point.

Borrowers need to be very nice to these skittish bond buyers to persuade them to fork over their cash.

If not, the consequences can be swift and fierce. Case in point: Chesapeake Energy bonds plunged Thursday after the energy producer announced an amendment to its credit line allowing it to incur as much as $2 billion in junior debt.

HP was testing the waters after a slowdown in issuance at the end of a tumultuous September because it needed to -- the spinoff of Hewlett Packard Enterprise, which sold the debt, is aimed at igniting some growth in the company that struggled to find its footing over the past few years.

Others have no choice but to dive in as well, and there is a good chance they’ll look back on the HP deal with a certain amount of envy.

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

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