The Bank Credit Crunch Spawns Bonds

In my firm the investment team discusses a variety of economic issues and fixed income strategies. As an equities manager, I am pleased to learn from my associate's experience and wisdom. Some of what they say sounds so simple, but is not always so easy to execute.

Right now interest rates are near zero. It is a good time to borrow money if there is a strategy behind the borrow. The strategy is key and it can be as simple as retiring old debt, refinancing to lower payouts and stretching payments for the long-term at very favorable rates.

	Price	Yield
2-Year	100.188	0.9
10-Year	102.297	3.35
30-Year	105.156	4.2

As the chart (data from Bloomberg) above shows, the US government can borrow long-term money (30 years) for 4.2%. If I were running things, I would issue as much long-term paper as I could. This is a historic opportunity, but the government works, as we know in mysterious ways.

I on the other hand, have refinanced my life and borrowed money at what I feel is the lowest interest rate I will ever see. I read in the FT Tuesday, there are corporations (said with tongue firmly in cheek) just as smart as I am.

It seems some of the largest companies in the world are bypassing traditional bank lending for long-term debt. Is this a byproduct of the credit crunch and new lending practices for banks? Are they missing the lucrative boat, or are they participating in issuing the paper and bypassing lending restrictions? After all, revenue is revenue.

Companies Choose Bonds for Cheap Funds is an article in the FT by Anousha Sakoui and Nicole Bullock which appeared 10/12/09.

Companies have borrowed more from bond investors than from banks and other loan providers for the first time this year in a bid to lock in cheap, long-term funding.

Low interest rates and rising inflows into fixed-income funds have triggered record bond issuance as banks cut back lending. Global bond issuance from non-financial companies has reached $1,310bn in the year to date, surpassing corporate loan volume of $1,080bn, according to Dealogic. The data provider said this was the first time this had happened since it began collating records on the bond and loan markets in 1995.

Before the credit crunch, corporate loan volume was $4,160bn in 2007, a record four and-a-half times the volume of corporate bonds of $889.4bn. This year, US non-financial companies have raised $449.3bn in the bond market and $360bn in the loan market, and European non-financial companies $504.4bn from bond investors and $315.4bn in loans.

Companies as large as General Electric (NYSE: GE) and Royal Dutch Shell (NYSE: RDS.A) have taken advantage of the markets. Shell sold two-year bonds with a coupon of 1.3%, the lowest ever for a highly rated company.

General corporate purposes, refinancing debt that may be coming due, paying off banks and joint venture partners or building a war chest, money is cheap and the strong are eyeing the future before their peer group rivals catch the wave. I wrote about equity raises over the summer. Bonds are also filling coffers around the world.

Now the best part, I await the strategies smart, strong firms will craft with their newly filled piggy banks.

Disclosure: Mr. Corn is Chief Investment Officer – Equities of Beacon Trust Company. Through various equity strategies under his supervision he is currently long (RDS-A).

Comments

[jayinasia:]

"I on the other hand, have refinanced my life and borrowed money at what I feel is the lowest interest rate I will ever see."

Please check the historical fed interest rates. The same thing was said in 2003, 1993, 1987. Please notice the band in interest rates before, during, and after every downturn. The band is getting smaller. According to this chart, we should top out at about 4% before the next downturn. Sad.

www.federalreserve.gov...

Oct 14 07:52 AM

[phil from E...:]

Companies like GE are issuing bonds to substitute for the securitized loans no longer available to them that are being unwound. GE, I believe, is still deleveraging its balance sheet and addressing liquidity concerns.

Oct 14 10:24 AM