Big M&A deals seen keeping corporate borrowing spree alive

Bloomberg

Get ready for what could be another record year for corporate borrowing. The US tax overhaul is freeing up cash for companies and the Federal Reserve is hiking rates, but chief financial officers are still eager to borrow, UBS strategists wrote. The Swiss bank and Wells Fargo both expect businesses to sell as much US investment-grade and junk bond debt this year as they did in 2017, if not more, in part to fund an expected uptick in mergers and acquisitions.
If blue-chip corporate bond issuance sets another record, it would be the fifth year in a row that it reached a new high. The forecasts imply that the benefits from tax cuts are more likely to flow to shareholders than bond investors, and that for money managers, buying US company debt may not be the sure thing that many previously thought. “Companies are not going to pay down debt if investors aren’t worried about leverage,” UBS Group AG strategist Stephen Caprio said in an interview. “And investors aren’t worried about leverage.” Risk premiums for corporate bonds, or spreads, are tighter than can be justified by the tax overhaul, the strategists wrote.
So far investment-grade issuance is strong by historical standards. Net overall corporate debt levels, including non-financial investment-grade companies, high-yield borrowers and leveraged loans, have increased over the last several months, according to UBS strategists led by Caprio and Matthew Mish. Recent jumps in longer-term bond yields may give companies more incentive to lock in rates while they’re still relatively low, said Tom Hauser, a high-yield portfolio manager at Guggenheim Investments.
“There’s definitely an incentive for companies to get borrowing done now, given where yields are,” Hauser said. Guggenheim manages more than $189 billion of fixed-income assets.
Wells Fargo & Co. strategists led by Trey Winslett forecast gross issuance to rise one percent from last year due to upcoming maturities and mergers and acquisitions related funding, they said in a February 9 report.