M&A spurs US bond borrowing to $100bn

US companies have already issued almost $100bn worth of investment-grade bonds this year as huge acquisition-related deals pushed borrowing to its highest level in five years.

Highly rated companies have borrowed $98.5bn since the beginning of this year, according to Thomson Financial – an 11 per cent increase on the same period in 2005 and the biggest total since the $112.5bn of debt issued in 2001.

“It’s the long-predicted [mergers and acquisition] boom coming to the bond markets,” said Jim Turner, head of North American debt capital markets at BNP Paribas. “The M&A market is difficult to predict but if, six months ago, company A bought company B, it is usually just a matter of time before they come to the bond market.”

Cisco last week borrowed a record $6.5bn to fund its $6.9bn acquisition of Scientific-Atlanta, the set-top box manufacturer. It had never before issued a corporate bond, making the deal the biggest ever bond market debut by any company.

Verizon borrowed $4bn, in part to help fund its MCI acquisition of last year and last month Oracle sold $5.75bn of bonds towards financing its $5.85bn acquisition of Siebel Systems.

Michael Mutti, credit strategist at Bear Stearns, said: “Companies are also being pressured by shareholders to lever up and that could also lead to more borrowing.”

Companies have been using up cash piles for new investment and to raise dividends to shareholders. The trend began in 2004, but accelerated last year. It has eaten into remaining cash balances. According to Fitch Ratings, the gap between the cash on companies’ balance sheets compared with their capital expenditures and cash dividends narrowed by about 50 per cent last year.

“As long as the economy remains firm, industrial companies will need to go back to the bond market this year,” said Mariarosa Verde, head of credit market research at Fitch. “Since long-term rates are still low, it is not a bad time to go to the market now, which is likely contributing to the surge early in the year.”

“These are the biggest jumbo multi-tranche transactions we’ve seen for several years,” added Mr Turner.

Cisco’s bond issue was split into several slices to attract different investors, with $500m of three-year floating-rate notes, $3bn of fixed-rate five-year notes and $3bn in 10-year paper.

Total investment-grade borrowing last year reached $603.8bn and is expected to be about the same this year.

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