Record Bond Buybacks Show Treasurers Making Hay While Sun Shinesby
Rising borrowing costs signal repurchase window may be closing
Companies also spending cash to lower debt costs, leverage
Corporate executives are facing the possibility that debt markets in Europe may never be as good as they were in 2015.
Borrowers including Telecom Italia SpA and LafargeHolcim Ltd. bought back about 35 billion euros ($38 billion) of their own bonds, a record according to data compiled by Citigroup Inc. which tracks all currencies and also includes companies in Russia and former Soviet republics. Treasurers have taken advantage of cheap funding costs and are using cash piles to buy the debt as they seek to cut interest payments and reduce their leverage.
Unprecedented European Central Bank stimulus helped push down yields to a record in April, but borrowing costs have risen since then to the highest in more than a year amid a series of economic shocks that prompted Mario Draghi to reboot his bond-buying plan this month. Treasurers can’t be sure how long their buyback opportunity will last.
“Given how low rates have been, why wait until later to refinance a bond?” said Frazer Ross, a managing director on the debt syndicate desk at Deutsche Bank AG in London. “Those that are buying back bonds aren’t expecting all-in funding rates to fall further.”
Italy’s biggest phone company completed 3.8 billion euros of bond buybacks in the first three quarters as it seeks to cut debt to recapture an investment-grade rating. LafargeHolcim, the world’s largest cement maker, purchased 2.25 billion euros of notes in September partly using cash from asset sales it made to get regulatory approval for its merger in July.
UBS Group AG, Switzerland’s biggest lender, bought about 6.1 billion francs ($6.2 billion) of senior and subordinated debt last week and Royal Bank of Scotland Group Plc purchased the equivalent of 2.4 billion pounds ($3.6 billion) of notes last month.
Average yields on investment-grade bonds in euros are at 1.5 percent, Bank of America Merrill Lynch index data show, pushed up from a record-low 0.84 percent in April by a selloff of bonds globally, economic slowdown in China and a slump in commodity prices.
Still, the average yield for 2015 is 1.2 percent, compared with 3.3 percent for the past 10 years, the data show. That allowed some companies to effectively swap bonds for cheaper debt.
Iberdrola SA made a 2.5 percentage-point saving on interest payments in September when the Spanish utility bought back 500 million euros of bonds that pay a 4.25 percent coupon and sold the same amount of securities at a lower rate.
Companies are “being prudent and locking in funding conditions while they can,” said David Leeming, head of liability management at RBS in London. “Companies are wondering if they’re going to be able to issue at ultra-low rates in four or five years’ time when their bonds mature.”
Some firms have taken advantage of their bonds trading at stressed levels to buy them back at a discount. Others have put reserves to work in buying back securities as Europe’s muted economic recovery deters investment in factories and negative deposit rates make it costly to hoard cash.
Glencore Plc, struggling against a slump in commodity prices, said last month it had repurchased about $400 million of notes since the end of September, after a rout drove yields on some of its securities to junk levels. Repsol SA bought $1.5 billion of bonds sold by its Talisman Energy unit at a 14.5 percent discount, reducing annual interest payments by $65 million and boosting pretax income by at least $220 million, the Spanish oil company said earlier this month.
“There’s been a lot of volatility in the market and that has presented opportunities for companies to buy back their bonds below par,” said Graham Bahan, the London-based head of liability management for EMEA at Citigroup. “I expect next year to be equally as busy.”