By Joseph Neu
The Fed seems to have stepped in it. Even if they completely banish all thoughts of tapering, the market is no longer going to let them forget that they must—eventually. And perhaps, this was their intent all along, step in it, wipe it off, but leave the stains to send the message that it is coming time for the cheap funding party to end.
For treasurers, the market reaction makes clear that they cannot rely on cheap debt to cover up for capital vices any longer. In other words, they will have to face up to any financial sins their firms have yet to atone for (or indulgences they have refused to pay).
- Sloth in waiting to (re)finance? Fortunately, few treasurers seemed to have waited to tap debt markets opportunistically. According to Thomson Reuters, corporates, both financial and non-financial, sold $1,610bn-equivalent across the globe in the first half of this year, up 3 percent compared to the first half of 2012. What’s more, most of this activity took place in the first quarter. The $723.9bn issued in Q2 was a decline of 18 percent on the first three months of the year, and the slowest quarter of issuance since the $519.6bn raised in Q4 2011.
In loan markets, Reuters reports that more than $145bn in new loan deals have been shelved since late May, leaving the market to firms with imminent financing needs. Per Thomson Reuters, refinancing and repricing deals have fallen to about 25 percent of the institutional loan pipeline from a peak of nearly 90 percent in late January.
In January-May 2013, 50-125 deals a month launched, with monthly volume of $30-60bn, according to Thomson Reuters data. And in the first three weeks of June: a paltry 16 deals totalling $3.7bn were issued.
Treasurers in emerging markets also showed they were no sloths. According to Bank of America Merrill Lynch, record levels of corporate debt ($190bn) were issued in the first six months of this year, up 50 percent from last year, with corporate and sovereign issuance together totalling $231 billion, compared with $172bn in the same period in 2012.
Here again, June has seen a dramatic downturn, with just 16 deals totalling the equivalent of $3.7bn, compared with January-May deal flow of 50-125 a month, with monthly volume of $30-60bn, according to Thomson Reuters.
- Greed, gluttony, pride, lust or envy with use of proceeds? Given that so many firms appear well-funded, the next question is whether they have succumbed to other capital vices with the money raised.
In a report issued in late May, Standish, the fixed-income specialist arm of Bank of New York Mellon, noted the increasing number of corporate debt issues to fund special dividends and share buybacks. “Both trends are detrimental to bond holders,” said Thomas D. Higgins, chief economist for Standish.
Since dividends (less easily reversed than buybacks) represented 40 percent of cash payouts in Q1, according to S&P, it is fair to wonder if lust and envy over the performance of dividend stocks drove firms to fund ill-advised payout ratios.
And what about other sins that might be driving buyback efforts to boost share price? Preliminary results show that S&P 500 stock buybacks, increased just 0.8 percent to $100bn during the first quarter of 2013, up from the $99.1bn spent on share repurchases during the fourth quarter of 2012. Year over year, though, buybacks are up 18.6 percent.
Still, it is relatively good news that despite the record level of buyback announcements, the 12-month period (ending March 2013), shows S&P 500 issues increased their buyback expenditures by just 3.8 percent: to $414.6bn from the $399.5bn for the prior 12 months. This is well below the high reached in 2007, when companies spent $589.1bn over the 12-month period.
Moreover, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, while companies continued to protect their earnings from option dilution, “actual shares repurchased were down, as the 0.8 percent increase in expenditures failed to keep pace with the 6.8 percent increase in the average share price for the quarter.”
- And wrath? Despite signs that firms may not have sinned more than they can afford to, the wrath of shareholders wanting more cash returned may pale in comparison to their wrath if firms show they failed to invest adequately to sustain cash growth. It will take an end to cheap debt for them to find out who has sinned in this way.