Corporate treasurers pounce on ultra-low borrowing costs

US-China deal hopes rise — but big questions remain

If you want an idea of the real world activity being financed by historically low interest rates, step inside the 15-storey condo under construction at 77 Charlton Street, New York. Building materials litter the ground where plans show a sleek, open lobby, with a glass-lined walkway overlooking a 1,600 sq ft swimming pool. When it is completed in the autumn of next year, the two-tower structure will become US luxury homebuilder Toll Brothers’ 27th finished property in the New York City area. It is being financed in part by debt lapped up by yield-starved investors amid a global rally for bonds — which has driven Toll Brothers’ cost of borrowing to its lowest level for more than a decade.Last week the Horsham, Pennsylvania-based company sold a $400m 10-year bond with a coupon of just 3.8 per cent, joining a tiny club of companies that have managed to sell what are traditionally called high-yield bonds, also known as “junk” bonds, below 4 per cent.It plans to use the cash raised to pay off a $250m bond with a coupon of 6.75 per cent coming due in November, with the leftover filtering through to its main business of building homes, like those at 77 Charlton. The bond sale is indicative of a deluge of debt that has hit US markets. Corporate treasurers have sold $120bn worth of new bonds across more than 100 different deals so far this month, according to Dealogic.In many cases, it has been to take advantage of low financing costs to pay off existing, more expensive debt and lengthen the amount of time the companies have to pay it back.Gregg Ziegler, corporate treasurer at Toll Brothers, said that even with the $150m in net additional borrowing, the company’s all-in interest expense will reduce by roughly $2m per year. It marks the lowest borrowing cost for the company since 2005, during the height of the housing boom.

I think you are starting to see investors nibble at some of the more challenged credits

“The savings in interest are dramatic,” he said. “If we can have one of the lowest yields 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 $750m junk bond with a coupon below 4 per cent, citing the move lower in interest rates and “strengthening” demand for junk bonds in a response to the Financial Times. Higher up the ratings ladder, telecoms companies Verizon and AT&T sought to further their commitments to reducing their mammoth debt piles by issuing $2.1bn and $3.3bn, respectively, both to refinance other debt. “It’s not only the dollar amount, it’s the sheer number of deals we have seen,” said Monica Erickson, a portfolio manager with asset manager DoubleLine Capital.It all began in last month. A rapid decline in Treasury yields, stoked by renewed trade tensions between the US and China, opened up an opportunity for corporate treasurers. “As interest rates were falling through August we were getting updates from our bankers,” said Mr Ziegler. But debt sales typically grind to a halt in the summer until investors and bankers return to their desks after the Labour Day holiday. “We wanted to be in a position coming out of Labour Day to do something.”During the four days to September 6, there was a record amount of bonds sold globally and in the US, according to Dealogic, easily digested by investors across the globe who are battling to generate returns with about $14tn of negative yielding bonds outstanding. 
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Cash flowed initially into funds that buy higher-rated investment grade debt, then slowly, as fears of an impending recession have softened, into riskier junk bonds. It is a precarious balancing act, with investors keen to remain in higher-rated bonds that have a better chance of surviving a downturn in the US economy, while still being lured in by the higher returns on offer from lower-rated debt. “I think you are starting to see investors nibble at some of the more challenged credits,” said John Gregory, head of leveraged finance at US bank Wells Fargo.Demand has allowed some loosening of lending standards, said Valerie Potenza, an analyst at Xtract Research. “We are seeing weaker provisions and more flexibility for issuers,” she said. “It’s unfortunate for investors.”Still, there is little sign of any reversal yet. Sometimes, when such a large amount of debt hits the market, prices start to sink, as investors begin to lose their appetite. The yield on an investment grade corporate bond index run by Ice Data Services has risen from 2.87 per cent to 3.16 per cent this month, but that has largely been driven by Treasury yields, which underpin bond prices, moving higher. Its index for the lower-rated, junk bond market has seen its yield fall from 5.87 per cent to 5.82 per cent, despite the recent rise in Treasury yields. It suggests there is more money out there willing to finance companies like Toll Brothers. “Low interest rates are in vogue,” said Mr Ziegler. “We may be in a period like this for sometime.”The FT is free to read today. You can share this article using the buttons at the top.


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