COMPANIES PAY MORE TO BORROW IN RECORD BOND RUSH / THE WALL STREET JOURNAL

Companies Pay More to Borrow in Record Bond Rush

Rising bond sales suggest companies don’t expect debt to get cheaper soon

By Jack Pitcher

The 10-year Treasury yield sat at almost 4.3% Thursday, up from around 3.95% at the end of July. PHOTO: NATHAN HOWARD/BLOOMBERG NEWS

Borrowing money is more expensive than it has been in a decade. Companies are paying the price. 

Large companies with top credit ratings issued bonds at a record clip this week despite a rise in Treasury yields that sent borrowing costs to a roughly 15-year high. 

Nineteen companies on Tuesday sold 47 bond tranches in the U.S. investment-grade market, according to PitchBook, a record since the data provider began tracking deals in 2012. 

Duke Energy, Southern Co., and Philip Morris International were among the borrowers. 

Tuesday’s bond sales totaled almost $38 billion. 

It was the best sales day since April 2020 when the Federal Reserve had cut rates to near-zero. 

High-grade firms paid an average of 5.7% to borrow this week, a level many haven’t paid since the global financial crisis. 

Companies on Wednesday sold 10 more bonds totaling $13.5 billion in the U.S. 

The week after Labor Day is typically one of the busiest borrowing windows, when Wall Street returns from summer vacation. 

This year, would-be borrowers had to contend with rapidly rising Treasury yields. 

Companies pay an interest rate premium over Treasurys—known as a “spread”—to compensate investors for the extra risk.

The 10-year Treasury yield sat at nearly 4.3% Thursday, up from around 3.95% at the end of July.

“We’re seeing borrowers come to grips with the reality that rates are probably not going lower in the very near term,” said Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo. 

Resigned that interest rates are heading higher, borrowers are locking in funding now ahead of any further uncertainty from central-bank meetings or unexpected events that could disrupt the flow of credit.

Higher interest costs will cut into profits in the coming years. 

The costs will hit firms with lower credit ratings the most. 

The average coupon—or fixed rate paid by a bond issuer—on the Bloomberg investment grade corporate bond index sits at 3.95%, an indication that borrowers are used to paying rates far less than current levels. 

The average investment-grade company refinancing debt now is paying rates about 2 percentage points higher than on the bonds they are replacing.

Duke Energy was among the large companies with top credit ratings that issued bonds this week. PHOTO: MATTHEW BROWN/ASSOCIATED PRESS

Issuing a few bonds at higher rates only marginally raises the overall cost of capital for large borrowers with lots of outstanding debt, O’Connor said. 

Selling bonds has been easy: Large, long term investors such as pension funds and insurance companies have been eager buyers of high-quality bonds that now pay more than 5%. 

“Deals are going exceptionally well even in the face of all the macro headwinds,” said Meghan Graper, global co-head of debt capital markets at Barclays. 

Duke Energy CEO Lynn Good said the company pays close attention to rising borrowing costs. 

The company is looking at “levers we have within our financial plan to offset that,” she said last month on a call with analysts.

Much of this week’s issuance has come from financial institutions, which focus more on the spread they are paying over Treasurys than on total yields. 

Spreads on investment-grade bonds are near the lows of the year. 

The drop reflects investor confidence that the economic outlook has improved and companies are in good financial health. 

Rising financing costs combined with still high equity valuations have put a chill on merger and acquisition activity.

Global M&A volumes are down 40% year-to-date and running at the slowest pace since 2013, according to Goldman Sachs Group research, excluding when the Covid pandemic put deal making on ice in 2020.

“Because it’s more expensive to borrow, M&A becomes less attractive to companies,” said Matt Brill, head of U.S. investment grade credit at Invesco. 

Higher costs also will slow opportunistic bond sales aimed at driving growth or funding dividends, he said.

Activity already has started to slow since Tuesday’s bonanza. 

Wall Street bond dealers indicated they expect supply over the rest of September to be slower than expected, largely because of the recent rise in rates. 

For companies with speculative-grade credit ratings—borrowers with a heavy debt load relative to their earnings that are viewed as a higher default risk—rising rates are much more of a headache. 

A particular pain point is for issuers of leveraged loans, a type of syndicated loan with a floating interest rate issued by companies with poor credit ratings. 

Companies issued at least six leveraged loans this week through Thursday, totaling $9.3 billion, according to PitchBook.

“It takes time for higher borrowing costs to impact the bottom line,” said John McClain, a high yield portfolio manager at Brandywine Global Investment Management.

Leveraged loan issuers are going to see a hit to profits at a minimum, and some are going to start burning cash due to higher interest expense, he said.