US companies push through bond deals amidst the nerves of the debt ceiling

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US companies are scrambling to borrow money in the bond market, anticipating deals in case the country’s debt ceiling stall causes turmoil over the summer.

Highly rated companies have issued $112 billion worth of bonds so far this month, according to data from Dealogic, up from $46 billion in May 2022 and more than triple the amount sold in April. Excluding 2020, when ultra-low interest rates sparked a $196 billion lending spree, this year’s May corporate issuance is the highest in seven years.

Bankers who manage corporate bond the deals say borrowers are making the most of a relatively buoyant market environment to tap into investors now before any possible volatility erupts from the cash-strapped US government, a scenario that could have cascading implications for asset prices global.

“It’s fair to say there has been some acceleration” in issuance, said Richard Zogheb, head of global debt capital markets at Citi.

The offers that had been anticipated reflect “a combination of ‘let’s avoid the nonsense of the debt ceiling and take advantage of what is a pretty good market,'” he added.

Broader concerns about the economy are also playing into timing decision-making, according to market participants. With the increase in the Federal Reserve interest rates from near zero to a target range of 5% to 5.25% in 14 months, fears of the US entering a recession have intensified.

Zogheb said that “the acceleration was given by people who were planning to enter the market in a relatively short or medium period”, in June or July, and instead said “’we will only go now. . . we might as well avoid this whole issue’”.

The deadlock over the US federal lending limit has heated up in recent weeks, with the Treasury secretary Warning from Janet Yellen that the so-called date x – the moment when the government runs out of money and risks defaulting on its debt – could come as early as June 1st.

While the government is widely expected to avoid default, which would occur if it fails to make scheduled payments to investors holding treasury bills, a prolonged standstill could disrupt larger transactional activity. The $24 trillion Treasury market is considered the deepest and safest in the world and is referenced globally to determine the price of many other assets.

US investment grade bond yields, reflecting borrowing costs, are now hovering below 5.5%, down from a peak of 5.71% during the March banking sector disruption, and sit below below the highs of last autumn by more than 6%. Spreads, or the premium that companies pay their investors over Treasuries, have remained broadly stable this month.

“I think the combination of Treasuries with an acceptable corporate yield, coupled with the potential that there could be dislocations in the market over the summer with respect to the debt ceiling, has made it almost a no-brainer for companies to ramp things up” , said Teddy Hodgson, co-head of Morgan Stanley’s global investment grade syndicate.

“We’ve seen issuers frontload funding to take advantage of favorable market conditions,” said Dan Mead, head of the investment grade syndicate at Bank of America Securities. But companies are also “aware that there’s a lot of event risk out there.”

“There’s a combination of the debt ceiling, the Federal Reserve and economic concerns” driving all of this.

May is often a stronger month for emissions, and March and April were weaker after a big February.

Still, 56 companies priced investment-grade U.S. bond deals in May, Dealogic data shows, with more than two-thirds of proceeds going primarily to finance acquisitions, the highest proportion since December 2021. Pharmaceuticals group Pfizer on Tuesday launched a jumbo- $31 billion bond sale, implemented to help finance the Seagen purchase.

A market participant who declined to be named suggested that Pfizer, oil and gas group Ovintiv and sub-investment grade life sciences firm Iqvia were among the borrowers whose bond sales this week came in slightly ahead of as expected by the market.

Pfizer, Ovintiv and Iqvia did not respond to requests for comment.

Bankers and analysts pointed out that high-yield and low-rated companies were generally more focused on credit conditions and risk appetite than macroeconomic factors such as the debt ceiling, and tended to tap capital markets less frequently than their investment grade counterparts.

For Maureen O’Connor, global head of high-quality debt syndication at Wells Fargo, “Economic uncertainty in the form of the classic recessionary headwinds is what is driving issuers into the beginning of the year. And then the more forthcoming debt ceiling has probably added fuel to that fire, which is why we’re seeing so much volume in May.

Citi’s Zogheb said a more positive backdrop has encouraged issuers to borrow this week, “especially as news broke that [in Washington] they were negotiating and things were moving in the right direction.” However, “if we get through the weekend and they say we took a big step back, we could definitely see volatility. We could see companies take a step back.”

O’Connor said the US investment grade market is “incredibly resilient” and “for the right names, there will always be an audience.”

“I try to preach some calm to those who are concerned that the debt ceiling debate will be ‘lights out’ for our market,” he said, “because it’s not.”