The world’s highest-rated companies, including Warren Buffett’s Berkshire Hathaway, Disney and the drugmaker Pfizer, have bolstered their ability to weather the economic downturn, swallowing higher borrowing costs to raise hundreds of billions of dollars of debt while lower-rated issuers struggle.
Global corporate bond issuance by “investment grade” companies has surged to $244bn so far in March, the highest monthly total since a record $252bn was sold in September, according to Dealogic. The US has led the charge with a record $150bn of new bonds sold, and $28bn has been raised in Europe. Adding in a raft of new bank bond sales from the likes of Wells Fargo and Goldman Sachs takes the global tally to $408bn this month, separate data from Refinitiv showed.
Issuance was particularly prolific last week, after central banks and governments around the world announced further supportive measures for financial markets, including the Fed taking the unprecedented step of announcing that it would begin to buy corporate bonds.
The coronavirus outbreak has prompted a general dash for cash from companies around the globe, with groups drawing down emergency credit lines alongside the spate of debt issuance. Corporate treasurers are trying to shore up balance sheets so they can outlast any drag on revenues from the economic slowdown.
“People want to build a cushion for economic uncertainty,” said Andrew Karp, who runs Bank of America’s global investment grade capital markets business, who noted that previous weeks had seen a virtual drying-up of issuance, as alarm over the virus spread. “When you get the opportunity to access the market, people will jump through that window.”
The past week’s US corporate issuance also made records, topping $73bn, according to the Dealogic data. The sum is extraordinary because unlike previous weeks of hefty issuance, it has not included financing for a big acquisition, said bankers.
Borrowing costs for US investment-grade companies have risen as the coronavirus crisis has threatened the creditworthiness of many issuers and caused dislocations in parts of financial markets.
The average yield on an index of investment-grade bonds run by Ice Data Services sits at 3.9 per cent, up from an all-time low of 2.26 per cent earlier this month.
Some companies have come to market multiple times in recent weeks, despite the rising costs. Berkshire Hathaway issued a $500m 10-year bond on March 4, paying just shy of 0.9 per cent above US Treasury yields. Last week its energy subsidiary sold $1.1bn of 10-year debt at an interest rate 2.85 per cent above Treasuries.
“In uncertain times like this it is important to demonstrate you have market access and can secure liquidity,” said Tomas Lundquist, head of European corporate debt capital markets at Citigroup.
Lower-rated companies in the high-yield, or “junk” bond market have not had the same access. There have been no new high-yield bond sales in the US since March 4, while the drought in Europe has lasted more than a month.
Analysts warn that despite higher-rated companies bolstering their cash piles, rising corporate defaults could still ricochet through the economy. Around $9tn of outstanding corporate debt has built up over the past decade while borrowing costs have been low.
Companies have already begun cutting staff in an attempt to save costs, with the number of Americans filing unemployment claims in the US hitting an unprecedented 3.3m over the past week, from just 200,000 two weeks ago.
On Friday, rating agency Moody’s said that if lockdowns around the world are short and swift, the global default rate would reach 6.5 per cent this year. But in a more severe recession, extending into the second half of the year, defaults could surpass levels seen in the 2008 financial crisis and soar to 18.3 per cent.
“If you are [a company] reliant on cash flow from revenues and those stop then that is a severe shock,” said Atsi Sheth, chief credit officer for the Americas at Moody’s. “At the same time credit conditions would become tighter and tighter for those companies.”