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May 11, 2011 6:58 pm
The rise in buy-backs and deals marks a turning point in the credit cycle, as companies become more willing to invest their cash and borrow more money. Since the 2008 financial crisis, many companies have been hoarding cash and building up ever greater treasure chests and rainy-day funds.
“We are reverting to more typical historical averages and we are expecting the proportion of M&A financing in the bond markets to rise further this year,” said Bryan Jennings, managing director at Morgan Stanley.
So far this year, companies with investment-grade ratings have borrowed more than $200bn in the dollar-bond market, up from $134bn by this time last year, according to Dealogic. This figure excludes bond sales by financial institutions.
It is difficult to pinpoint how much of the borrowing by companies with investment-grade ratings is for activities such as share buy-backs and deals, and how much is used for capital spending or other purposes. Many companies do not specify exactly what they use bond proceeds for.
Some do, however. This week, tobacco company Philip Morris sold $1bn of bonds and said possible uses “include share repurchases”. Telecoms group AT&T’s $20bn bridge loan for its $39bn cash-and-stock purchase of Deutsche Telekom’s T-Mobile USA is expected to be refinanced in the bond markets.
Mr Jennings has analysed bond sales by investment-grade companies since 2006. He estimates that about 20 per cent of the money borrowed in the dollar-bond markets in 2006 and 2007 was used to finance M&A.
That proportion dropped to between 10 per cent and 15 per cent in 2008 and to below 10 per cent in 2009 and 2010, he calculates. This year, the ratio has risen sharply and he expects it will return to about 20 per cent.
One factor fuelling bond sales is the fact that borrowing costs have remained at historically low levels. The recent fall in US Treasury yields has resulted in a decline in corporate borrowing costs back to record lows. After rising to just over 4 per cent in April, the average yield on bonds sold by industrial US companies tracked by the Barclays Capital bond index has this week fallen back down to 3.75 per cent, for example.
“Many companies are surprised that interest rates are still this low, and they now have a chance to get a second bite at the apple,” said Jonathan Fine, head of the US investment-grade syndicate for Goldman Sachs, which expects $100bn of bond sales by companies with investment grade ratings in May. “There is a pretty homogenous expectation that long-term yields will go up.”
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