Borrowing costs

Corporate treasurers leap on ultra-low borrowing costs

If you want to get a feel for real-world activity funded by historically low interest rates, step into the 15-story condo under construction at 77 Charlton Street, New York. Building materials litter the floor where plans show a sleek, open lobby, with a glazed walkway leading out to a 1,600 square foot pool.

When completed in the fall of next year, the two-tower structure will become the 27th completed property of US luxury home builder Toll Brothers in the New York City area. It is funded in part by debt taken on by short-lived investors as part of a global rally for bonds – which has pushed Toll Brothers’ cost of borrowing to its lowest level in more than a decade. .

Last week, the Horsham, Pa.-Based company sold a $ 400 million 10-year bond with a coupon of just 3.8%, joining a small club of companies that managed to sell what the High yield bonds, also known as “junk”, are traditionally called less than 4 percent.

He plans to use the money raised to repay a $ 250 million bond with a 6.75% coupon maturing in November, with the leftovers being transferred to his main home building business, like those at 77 Charlton. .

The bond sale is indicative of a deluge of debt that has hit US markets. Corporate treasurers have sold $ 120 billion in new bonds in more than 100 different deals so far this month, according to Dealogic.

In many cases, this involved taking advantage of low financing costs to pay off more expensive existing debt and lengthening the repayment period for businesses.

Gregg Ziegler, corporate treasurer at Toll Brothers, said that even with the additional $ 150 million in net borrowing, the company’s all-inclusive interest expense would decline by about $ 2 million per year. This is the lowest cost of borrowing for the business since 2005, at the height of the real estate boom.

“The interest savings are spectacular,” he said. “If we can have one of the lowest returns ever, we’ll take it. “

The company is not alone. Restaurant Brands International, which owns fast food chains Tim Hortons and Burger King, also sold a junk $ 750 million bond with a coupon of less than 4%, citing lower interest rates and “strengthening.” of the demand for junk bonds in response to the Financial Times.

Higher up the ratings ladder, telecoms companies Verizon and AT&T have sought to bolster their commitments to cut massive debt by issuing $ 2.1 billion and $ 3.3 billion, respectively, both to refinance funds. Other debts. “It’s not just the dollar amount, it’s the sheer number of transactions we’ve seen,” said Monica Erickson, portfolio manager at asset manager DoubleLine Capital.

It all started last month. A rapid decline in Treasury yields, fueled by renewed trade tensions between the United States and China, has opened an opportunity for corporate treasurers.

“As interest rates fell through August, we were getting updates from our bankers,” Ziegler said. But debt sales typically stop in the summer until investors and bankers return to their desks after the Labor Day vacation. “We wanted to be able to do something after Labor Day.”

In the four days leading up to September 6, a record number of bonds were sold around the world and the United States, according to Dealogic. This was easily digested by investors around the world who are struggling to generate returns with around $ 14 billion in negative yielding bonds outstanding.

Cash flowed first into funds that buy higher quality debt securities and then slowly, as fears of a looming recession faded, into riskier junk bonds.

This is a precarious balancing act, with investors keen to stay in higher-rated bonds that have a better chance of surviving a downturn in the U.S. economy, while being drawn to the higher yields offered by lower rated debts. “I think you’re starting to see investors chomping down on some of the most contested credit,” said John Gregory, Charlotte-based leveraged finance manager at Wells Fargo Securities.

Strength in demand has allowed some relaxation in lending standards, said Valerie Potenza, analyst at Xtract Research in New York City. “We are seeing weaker provisions and more flexibility for issuers,” she said. “It’s unfortunate for investors.”

Yet there are still few signs of a reversal. Sometimes when such a large amount of debt hits the market, prices start to drop, investors starting to lose their appetites.

The yield of a high-quality corporate bond index managed by Ice Data Services fell from 2.87% to 3.06% this month, implying lower prices. Much of this can be attributed to rising government bond yields, which are the market benchmark.

Meanwhile, Ice’s index for the lower-rated junk bond market saw its yield drop from 5.87% to 5.75%, suggesting there is more money ready to go. fund companies like Toll Brothers.

“Low interest rates are all the rage,” Ziegler said. “We can be in a time like this for a while.”