Corporate bonds continue to boom. According to Moody’s Investor Services, US-domiciled companies are leading the world in issuance, rising 56.8 percent in the last five months vs. the same five-month period last year. The US issuance is far outpacing the rest of the world, which plunged 22 percent in the same period.
“With blinding speed, US corporates’ share of world corporate bond issuance soared from yearlong 2014’s 44 percent to the 56 percent of January-May 2015,” Moody’s said in a press release.
This fits the narrative heard at a recent NeuGroup Engineering & Construction Peer Group (E&CTPG) meeting. At the meeting, members were told that when it comes to debt issuance, there has been little change from a year ago – which means all is well for issuance. Rates are low, tenors are long, and banks are flush with capital that they are ready to lend. One banker at the meeting noted that many companies are renewing their 5-year lines every year because the pricing is cheap and they want to lock in low rates for as long as possible.
Nonetheless, companies need to be aware that it’s a lenders market and banks are selective. The primary impact from Dodd-Frank and Basel III is that banks are being more selective about whom they are willing to bank with. To that point, some banks are leaving the US market altogether, specifically GECC and RBS, due to the high cost of regulations. Other banks are leaving the E&C industry due to its slowing.
Moody’s said refinancings “continue to lead all other categories regarding how companies plan to use funds secured through bond issues.” In the first five months of 2015, “the frequency with which refinancings were cited among uses of funds secured via dollar-denominated investment-grade bond offerings dipped by merely -4 percent year-over-year, to a still considerable 257 mentions,” Moody’s said.
Other uses of the issuance proceeds have gone to stock buybacks. S&P 500 companies listed buybacks or dividends among the use of cash from $58 billion of bond deals in the past three months, a record, according to data compiled by Bloomberg and Sundial Capital Research Inc. Moody’s said M&A is still the main driver for issuing debt, however, the number of bonds “at least partly linked to the funding of shareholder compensation (including dividends, stock buybacks, and LBOs) advanced by 62 percent annually,” according to its research.