Big companies raise record sums from bond market in dash for cash

Top-rated companies in the world, including Berkshire Hathaway, Disney, and drug maker Pfizer from Warren Buffett, have strengthened their ability to weather the economic downturn, swallowing higher borrowing costs to raise hundreds of billions of dollars. debts while the lowest rated issuers are struggling.

Global corporate bond issuance by investment grade companies has reached $ 244 billion so far in March, the highest monthly total since a record $ 252 billion was sold in September , according to Dealogic. The U.S. led the charge with a record $ 150 billion in new bonds sold, and $ 28 billion was raised in Europe. The addition of a series of new bank bond sales from Wells Fargo and Goldman Sachs brings the world total to $ 408 billion this month, separate data from Refinitiv showed.

The show was particularly prolific last week, after central banks and governments around the world announced new measures to support the financial markets, including the Fed taking the unprecedented step of announcing that it would begin to buy corporate bonds.

The coronavirus epidemic has caused a general rush for the liquidity of businesses around the world, with groups drawing on emergency lines of credit alongside the wave of debt issues. Corporate treasurers are trying to consolidate balance sheets so that they can survive any drag on revenues from the economic downturn.

“People want to create a cushion for economic uncertainty,” said Andrew Karp, who directs Bank of America’s global activities in quality capital markets, noting that the past weeks have seen near-zero emissions. , alarming the spread of the virus. “When you have the opportunity to access the market, people will pass through this window.”

The issuance of US companies last week also recorded records, exceeding $ 73 billion, according to data from Dealogic. The sum is extraordinary because unlike previous weeks of high issuance, it did not include financing for a large acquisition, explained the bankers.

Borrowing costs for blue chip companies have risen, with the coronavirus crisis threatening the creditworthiness of many issuers and causing upheavals in parts of the financial markets.

The average yield of a high quality bond index managed by Ice Data Services stands at 3.9%, against a historic low of 2.26% at the start of the month.

Some companies have entered the market several times in recent weeks, despite rising costs. Berkshire Hathaway issued a $ 500 million 10-year bond on March 4, paying just under 0.9% above US Treasury yields. Last week, its energy subsidiary sold $ 1.1 billion in 10-year debt at an interest rate 2.85% higher than T-bills.

“In uncertain times like this, it is important to demonstrate that you have access to the market and that you can guarantee liquidity,” said Tomas Lundquist, head of European corporate debt markets at Citigroup.

The lower-rated companies on the high-yield or “junk” bond market did not have the same access. There have been no new high-yield bond sales in the United States since March 4, while the drought in Europe lasted more than a month.

Analysts warn that despite better-rated companies boosting their liquidity stacks, the rise in corporate defaults could still ricochet the economy. Over the past decade, approximately $ 9 billion in outstanding corporate debt has accrued, while borrowing costs have been low.

Bar chart of the largest aggregated bond issue in March (billions of dollars) showing companies are raising cash to consolidate balance sheets

Businesses have already started downsizing to cut costs, with the number of Americans filing unemployment claims in the United States reaching unprecedented 3.3 million last week, up from just 200,000 a year ago. two weeks.

Moody’s credit rating agency said on Friday that if the bottlenecks in the world were short and rapid, the global default rate would reach 6.5% this year. But in a more severe recession, extending to the second half of the year, defaults could exceed the levels observed during the 2008 financial crisis and reach 18.3%.

“If you are [a company] dependent on the cash flow from the revenue and the revenue then stops, which is a serious shock, “said Atsi Sheth, credit manager for the Americas at Moody’s. “At the same time, credit conditions would become increasingly stringent for these companies.”

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