J&J, Kellogg Join an Investment-Grade Rush to Credit Markets

  • GM, JPMorgan help push February issuance over $100 billion
  • For top-rated companies `strong access to capital markets'

Kellogg Co. and Johnson & Johnson tapped the U.S. bond market for the first time this year, with their combined $8.9 billion pushing this month’s new investment-grade issuance over the $100 billion mark.

General Motors Co.’s finance arm, JPMorgan Chase & Co. and Union Pacific Corp. also sold bonds on Thursday, according to Bloomberg data, bringing this week’s investment-grade bond sales to $47.6 billion, the second-highest weekly volume this year. Cisco System Inc. and Goldman Sachs Group Inc. raised a combined $11.3 billion earlier this week. In January, $169 billion worth of deals were priced.

The investment-grade companies "still have very strong access to capital markets and thus are tapping to fund M&A, dividends and share buybacks," said John McClain, a money manager at Diamond Hill Investment Group.

The issuance comes as U.S. non-speculative grade bonds rose for a sixth-straight day, the longest run of gains in more than two months, with borrowing costs for top-notched American companies selling long-dated debt dropping.

Using Bank of America Merrill Lynch index

Johnson & Johnson is one of three U.S. corporate issuers with AAA ratings from Standard & Poor’s. The other two are Microsoft Corp. and Exxon Mobil Corp., which is facing its first downgrade in 86 years amid a slump in commodity prices.

Volatile Commodities

Kellogg sold a combined $1.4 billion of 10- and 30-year bonds on Thursday. The world’s largest cereal maker plans to use the funds raised to repurchase a portion of its debentures and repay commercial paper. The 30-year tranche was issued at 2 percentage points above comparable government debt.

Standard & Poor’s gave Kellogg’s senior unsecured debt a BBB rating, the second-lowest in the investment-grade category, it said in a statement on Thursday. The rating reflects the company’s well-recognized brands, leading market positions in the ready-to-eat cereal and snack food industries, but also its exposure to volatile commodity costs and the highly competitive cereal market, S&P said.

Johnson & Johnson sold $7.5 billion in senior unsecured debt in seven parts. The longest portion was a 30-year bond priced at 1.15 percentage points above comparable government debt. The New Brunswick, New Jersey-based company also issued 20-year notes.

Cash Flow

The world’s biggest maker of health-care products will use some of the proceeds to fund share repurchases, the person said. The company’s board approved a plan in October to buy back as much as $10 billion in shares, saying it would fund the repurchases with debt. Investors have also been waiting to see whether the drugmaker takes on a large acquisition to bolster its pharmaceutical division in a rapidly consolidating industry.

Proceeds from the sale may also be used to pay down the principal at maturity of Johnson’s $900 million of 2.15 percent notes, which mature in May, according to the person.

"They have significant free cash flow -- the issue with them is some of that cash flow is trapped outside the U.S," according to Jason McGorman, an analyst at Bloomberg Intelligence. While the deal will increase J&J’s leverage, the company remains so well-capitalized that the added debt doesn’t significantly hurt its credit profile, he said.

Before it's here, it's on the Bloomberg Terminal.