What record-setting Johnson & Johnson issue says about the market.
Johnson & Johnson’s record-setting bond issuance last Thursday put even more pressure on corporate treasurers to time the market perfectly when issuing debt so as to beat the cost of funds of their peers. Triple-A rated, J&J is a formidable act to follow what with its $1.1bn of 10-year and 30-year bonds that had coupons of 2.95 percent and 4.5 percent respectively.
While tough to match, one thing J&J did help clarify was that corporates aren’t yet beating sovereigns, at least not the US Treasury. The J&J issue carried spreads of 43bp on the 10 year and 68bp on the 30 year—which aren’t historically low. What will really be record settings is when corporate issues dip below their US Treasury equivalents.
This isn’t limbo
No treasurer, however, should be timing the market to set this record. Indeed, there is an escalating risk that firms will get too cute about funding windows and miss their opportunity. Even if the US economy is headed down a deflationary spiral where base rates could go negative, the appetite for new corporate debt is not unlimited, spreads could widen as risk appetites diminish; and what if J&J represents the bottom?
Debt financing is not limbo, so the bar for a successful issuance should not be judged the same.
Still, it is interesting to note how far we’ve come from corporates questioning their ability to even access capital markets to questioning whether they are going to be able to beat records on rates of financing.