Long Bonds a 'No-Brainer'

Multinationals are raising record amounts in bonds maturing in 10 years to 50 years or more.

The cheapest long-term borrowing costs on record are enticing companies into the bond market and allowing them to lock in rates for up to 100 years.

“My treasurer tells me, 'Always borrow when you can, not when you have to,'” said Simon Henry, chief financial officer at Royal Dutch Shell Plc.

Global borrowers from Shell in The Hague to Peoria, Illinois-based Caterpillar Inc. raised a record $368 billion this year from bonds maturing in 10 years or more, according to data compiled by Bloomberg. The average yield companies pay to raise long-dated debt worldwide fell 59 basis points this year to 4.4 percent, approaching the low of 4.1 percent reached in 2013, Bank of America Merrill Lynch data show.

The benefit to companies of selling long-term debt is that it reduces their risk of rolling over borrowings anytime soon. Treasurers are keen to beat increases in benchmark rates even as there are mixed signals as to when that will happen, with inflation remaining below central bank targets and many economies smaller than they were in 2007.

From a lender’s perspective, insurers and pension funds want the higher coupons offered by longer-dated bonds and like the guaranteed income to meet their far-reaching commitments. The average maturity of global company notes has climbed to 8.5 years, compared with 8.1 years over the past decade, Bank of America Merrill Lynch data show.


'Liquid Pools'

“There are huge liquid pools at whatever tenor we need,” Shell’s Henry said at The Economist’s Bellwether Europe conference in London on May 15. “There’s more capital out there than we can consume, a huge wall of money, a lot of it coming from emerging-market sovereign wealth funds and pension funds that’s looking for a home.”

Europe’s biggest oil company, which has $11.9 billion of cash on its balance sheet, priced 1 billion euros (US$1.37 billion) of 12-year notes to yield 2.5 percent in March, following a 30-year deal in August when it paid 4.59 percent to sell $1.25 billion of securities, Bloomberg data show.

Caterpillar, the largest maker of mining and construction equipment, sold its first 50-year notes this month, when it paid 4.8 percent to raise $500 million. Hasbro Inc., the Pawtucket, Rhode Island-based toymaker behind My Little Pony and Transformers, sold 30-year notes paying a 5.1 percent coupon, down from 6.35 percent when the company issued debt with the same maturity in 2010.

“In light of the very favorable interest-rate environment, we deemed it in the best interests of the company to lock in capital at attractive rates,” said Hasbro Treasurer Martin Trueb. “In addition to securing a lower interest rate, the issuance helped us stagger debt maturities at regular intervals.”

In the U.S., companies pay 4.7 percent on average to sell bonds of 10 years and more, approaching the all-time low 4.3 percent reached in November 2012, Bank of America Merrill Lynch data show. Average yields are at a record-low of 2.8 percent in Europe, down from a peak of 7.3 percent in 2008.

The likelihood of borrowing costs climbing in Europe is diminishing, with policy makers considering monetary easing next month to spur slow growth in the 18-nation euro area where inflation is at less than half their goal. In the U.K., a strengthening economy is leading some economists to predict a rate increase this year.


Market Is Hot

Transport for London, which oversees the capital city’s public transport system, sold its first 50-year notes this year with a coupon of 4 percent, the same amount it offered to raise 20-year debt in 2013.

“We’re in an environment where the economy is starting to improve and we believe interest rates will rise,” said Simon Kilonback, group treasurer at TfL. “It seems to be an attractive time to do long-dated deals.”

Notes maturing in 10 years and more returned 9.4 percent this year, more than double the returns from global corporate bonds on average, according to Bank of America Merrill Lynch data.

Among issuers this year, Electricite de France SA, the world’s biggest operator of nuclear reactors, debuted 1.35 billion pounds and US$700 million of 100-year notes in January. Their sterling notes gained 19 pence to trade at 117 pence on the pound. Massachusetts Institute of Technology raised $550 million from 100-year notes last month that are trading at 106 cents.

“The market is pretty hot,” said George Dessing, treasurer of Dutch business-to-business publisher Wolters Kluwer NV which raised 10-year debt this month. “We have a preference for longer maturity, and especially right now, at these low costs, it was a no-brainer.”

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