Blue-chip U.S. companies are slowing down on borrowing aftermonths of massive bond sales and hanging onto the moneythey've raised to insulate themselves from the pandemic.

|

The biggest U.S. banks hardly sold any notes after postingearnings, a time when they often issue heavily. Overall, corporatebond sales in July dropped by a third to about $60 billion from thesame time last year, according to data compiled by Bloomberg.

|

Corporations' reluctance to spend now reflects the intensity ofthe downturn that the Covid-19 pandemic is triggering. The U.S.economy shrank at an annualized pace of 32.9 percent in the secondquarter, the steepest drop since at least 1947, according to areport issued Thursday. Any slump in corporate expenditure willonly make the downturn worse, and underscores the limits of the Federal Reserve flooding thefinancial system with money if parties are wary of spending.

|

"Companies have a lot of cash on their balance sheets and theydon't seem to need more at this point," said Dominique Toublan,head of U.S. credit strategy at BNP Paribas SA. "Keeping that casha bit longer seems to be the safe thing to do given the currentuncertainty."

|

|

That may not bode well for the economy, but it could be apositive for bondholders: Lower supply combined with continuedsupport from the Federal Reserve and strong investor demand foryield globally could bolster company debt even as risks for thesecurities grow, JPMorgan Chase & Co. strategists wrote thisweek. The relatively light issuance from U.S. banks this monthafter their earnings are likely a taste of what we'll see fromother investment-grade companies in the coming months, theysaid.

|

Investment-grade companies have sold more than $1.2 trillion ofU.S. bonds this year, according to Bloomberg data, morethan they sold for each of 2018 and 2019. The biggest U.S. bankshave issued more than $155 billion, exceeding the $135 billion theyraised for all of 2019, according to Bloomberg data.

|

To the extent blue-chip companies are playing it safe now,they're reversing the trend of most of the past decade. The marketvalue of investment-grade corporate debt outstanding has more thandoubled since the end of 2011, while revenue for S&P 500members rose less than 40 percent between that year and the end of2019. Debt relative to measures like earnings has only deterioratedthis year, as sales for many corporations have plunged.

|

The picture for companies was deteriorating even before Covid-19spread. Total corporate profit after taxes fell 0.4 percent, to$1.95 trillion in 2019 from the year before, according to grossdomestic product figures.

|

Now the situation is worse, giving companies less incentive toinvest in new factories or use their cash for anything other thanholding on, said Lacy Hunt, chief economist at HoisingtonInvestment Management Co.

|

"There's no motivation from earnings to invest in capitalspending," Hunt said.

|

 

|

Debt Buybacks

Corporations are often willing to spend money to reduce risk.Some, for example, are buying back debt, usually notes that maturein the next few years and will need to be refinanced anyway. Takingcare of those bonds now reduces the potential for having to borrowin the future when it may be harder or more expensive.

|

High-grade companies tendered for a little more than $80 billionof bonds in the second quarter, compared with about $14.4 billionin the first quarter, according to BNP. AT&T Inc., the world'slargest non-financial borrower, sold $11 billion of bonds on Mondayto buy back high-interest debt due in the next five years.

|

In April and May, General Electric Co. and GE Capital sold morethan $10 billion of bonds, combined, and used the proceeds torefinance notes maturing over the next few years and other debt. GEoverall reduced its debt outstanding in the first half of the yearusing proceeds from the sale of its biopharma business.

|

Even some junk-rated companies are cutting back. Netflix Inc.,which is benefiting from higher revenues as more consumers stayhome and watch television and movies in the pandemic, said in its quarterlyresults this month that it won't need to issue new debt for therest of this year, and that it expects to have enough liquidity tofund its operations for at least the next 12 months.

|

Companies may rush to borrow again if the shutdown proves to beprolonged, or if it makes sense to refinance more debt maturing in2021, according to Erin Lyons, a credit strategist at CreditSights.But there's little sense from companies that they need to rush tolock in low rates now, because "rates aren't going anywhere anytimesoon," Lyons said.

|

"The other wild card could be M&A," Lyons said in atelephone interview Monday. "You could potentially see an increasein M&A, as debt is cheap and there's going to be batteredcompanies coming out of Covid, presenting a good opportunity tofind good assets, cut costs, and improve EBITDA [earnings beforeinterest, tax, depreciation, and amortization]."

|

—With assistance from MichaelGambale and Brian Smith.

|

Copyright 2020 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

  • Critical Treasury & Risk information including in-depth analysis of treasury and finance best practices, case studies with corporate innovators, informative newsletters, educational webcasts and videos, and resources from industry leaders.
  • Exclusive discounts on ALM and Treasury & Risk events.
  • Access to other award-winning ALM websites including PropertyCasualty360.com and Law.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.