UPDATE: Low rates drive record Q1 US corporate bond volume

4 min read
Americas
, Anthony Rodriguez

Borrowers like Apple have sold record amounts of debt in the US bond markets so far this year, as businesses race to shore up their finances and seize the moment before any rise in interest rates.

(Adds details on use of bond proceeds)

With the global markets expecting the Federal Reserve to hike interest rates this year, investment-grade and high-yield bonds have both reached new quarterly volume records.

Many companies have been driven more by a desire to boost share prices than build factories, issuing record amounts of debt to finance M&A, share buybacks and dividend payments.

The investment-grade market, saw US$342.2bn in year-to-date issuance through Monday, according to IFR data, easily the biggest quarter on record with six business days still to go.

“People expected the first quarter to produce a very large volume of deals, but no one was expecting this much,” said Edward Marrinan, head of credit strategy at Royal Bank of Scotland.

Meanwhile the high-yield market has tallied US$83.865bn, also a new record for the asset class, as investors hunt for better returns in the ongoing low-rates environment.

The combined tally of more than US$426bn has confounded predictions and surprised market players, many of whom had not anticipated such a torrid pace of new debt issuance.

Deal sizes have been exceptionally large, with the top 10 high-grade trades accounting for 25% of the year-to-date investment-grade tally.

Among those deals was a US$21bn bond from Actavis – the second-largest corporate bond ever and one of a wave of acquisition financings in the pharmaceutical sector.

“M&A financing has been the big driver,” Marrinan said.

But other large debt sales have been used to fund dividends and share buybacks, including a US$10.75bn transaction from Microsoft and a US$6.5bn trade from fellow tech giant Apple.

According to statistics compiled by Citigroup, buybacks and dividend payments exceeded capex as a use of cash among non-financial corporates in the fourth quarter of last year.

Of the cash internally generated and externally borrowed by the 418 non-financial companies in the S&P500, 44% went to fund dividends and buybacks versus 41% for capex.

Jason Shoup, head of investment-grade corporate strategy at Citigroup, said he expects that trend to have continued in the first quarter of this year, following the proliferation of jumbo deals and as big energy companies cut back on capex.

The previous full-quarter record of investment-grade and high-yield combined was US$378.4bn in the first-quarter of 2014.

(IFR does not include Reg S-only, covered or SSA bonds, US$25 retail preferred notes, or deals with maturities of less than 18 months in its volume tallies.)

Banks that underwrite and sell new bond deals say the US market has performed especially well, given that borrowing costs are generally cheaper overseas in the euro market right now.

“Frankly, it’s surprising,” Shoup told IFR. “You would have thought at the very least that a lot of US companies would be looking to issue into the euro market, where yields are lower.”

March is also closing in on being the biggest month of issuance ever, and with six days to go in both month and the quarter, new record highs are likely to be set every day.

Following are tables of the busiest quarters on record for the US high-grade market and first quarter 2015 US high-grade issuance versus first quarter 2014:

Amount (US$bn)Period
342.200*1st Quarter 2015
309.6182nd Quarter 2014
307.531st Quarter 2014
286.3262nd quarter 2008
284.4551st quarter 2012
268.5913rd quarter 2013
259.4281st quarter 2011
258.3181st quarter 2013
256.2224th Quarter 2014
253.1934th quarter 2012
246.5892nd quarter 2013
240.9733rd quarter 2010
237.7593rd quarter 2012
229.4473rd Quarter 2014
* Volumes year-to-date
Source: IFR data
1st quarter 2015 vs 1st quarter 2014
Amount (US$bn)Period
342.2001st Quarter 2015
307.531st quarter 2014
Source: IFR data
US corporate bond sales soar