Although it looks like a great time to go to market, there are some undercurrents that shouldn’t be ignored.
Could it be a better time for corporates trying to raise cash via bonds? Not really. With apologies to Gershwin, it’s summertime: the fish are jumping and the cotton’s high. Just the other day investment research firm TrimTabs reported that bond funds saw the 15th straight week of inflows of at least $5bn.
So seemingly countless firms are going to the well – in the latest week, among the more prominent issuers were Wal-Mart, PepsiCo and eBay. But despite the temptation of low rates and willing buyers, there are a few warnings signs that are lending the market a gold-rush-type feeling.
First and foremost is just the sheer number of issuers, which literally shouts “Warning!” And although there seem to be a bevy of buyers, many are starting to get picky. For treasuries, this means getting the house in shape before the sale. So secondly, consider the cash: it’s no secret that companies are loaded with it. However, having too much of it and at the same time having an underperforming stock, can keep the smart money away from a company’s debt. This is particularly true in the current earnings season where many companies, despite having a banner quarter, are paring back their outlooks. PIMCO’s head of its corporate bond portfolio told CNBC on Thursday that his firm had a “just say no” approach to companies that are underlevered or have weak fundamentals.
Finally, covenants are increasingly less restrictive, which some think reflects a bit of a bubble mentality. For instance, eBay’s offering on Wednesday, which was a $1.5bn unsecured debt issue, had none of the provisions that usually allow investors “to be compensated for a change of control, such as a takeover,” according to the Wall Street Journal. There reportedly were provisions restricting the company from doing things like “pledging property or equipment to a new creditor without sharing rights to that collateral with existing bondholders”: however, these terms were offset by an exemption stipulating that didn’t need to happen if the new credit line is “less than either $500mn or 20 percent of consolidated net tangible assets,” which are currently estimated to be about $1.8bn, the Journal reported.
Even a battered BP was able to issue bonds in late September with reportedly few meaningful restrictions; this after a devastating oil spill that some thought would put the company out of business just a month before. Incidentally, BP executed two bond auctions in a week, one in the US (a $3.5bn, 10-year offering) and in early October a EUR2bn offering in Europe that was reportedly four-times oversubscribed.
As a BusinessInsider.com story on the eBay deal suggests, “the whole thing feels very mid-September… like they’re trying to get through the door before it closes.”