Go big or go home: Why corporate debt raisings are getting bigger
Rupak Ghose
Bigger is increasingly better in capital markets – or at least more usual. It’s not just megacap stocks but also a clear trend towards giant deals in the corporate debt market.
This year has seen an increasing number of jumbo corporate debt offerings: both individual corporate bonds and packages of new corporate bonds, or bonds mixed with loans and private credit, being issued at the same time.
There are five main reasons why this rise in jumbo corporate debt offerings could be a sustainable trend: the big tech AI buildout, innovative structures, rising big cap M&A deals, private equity dry powder and the preferences of active bond managers.
Let’s start with big tech companies. According to LSEG statistics, year-to-date US corporate bond issuance by the sector of more than US$150bn is double the year-earlier period. Add in deals from joint ventures between tech companies and private equity firms that aren’t considered corporate bonds and the true number is nearer US$200bn.
The only notable large bond offerings by tech firms in the first half were a US$10bn raise by Synopsys to part-fund its acquisition of Ansys in March and senior notes from Google's parent Alphabet in May for US$5bn and €6.75bn.
Things started to hot up after Labor Day in the US. In late September there was Oracle’s US$18bn raise, then Meta Platforms-related vehicles came to market twice within the span of weeks raising US$27bn and US$30bn in October. The first week of November saw the turn of Alphabet with €6.5bn and then US$17.5bn.
Even more exciting for debt bankers is the massive pipeline of deals. With hundreds of billions of dollars in AI-related capex coming in the next few years, big tech free cashflow is about to collapse, leading to the necessity for more jumbo bond offerings.
Take Alphabet. CFO Anat Ashkenazi told analysts on October 29 that the company expects to spend at least US$91bn in 2025 – with a “significant increase” in 2026.
Innovation
Connected to this is a second important factor: innovative structures that sit at the intersection of bonds and private credit. The US$27bn Meta deal in early October, for instance, was off balance sheet: a special purpose vehicle with Meta owning 20% and private credit manager Blue Owl 80%. Proceeds are to be used to fund the buildout of a new data centre. Pimco took down US$18bn of the debt on its own, suggesting there is plenty of room for more of these transactions, combining features of private credit and bonds.
Third is that corporate boardrooms are feeling the animal spirits again and M&A is booming. Deals are getting larger and these are often the source of jumbo corporate bond offerings. The largest corporate bond remains Verizon’s US$49bn deal from 2013, followed closely by US$46bn and US$40bn deals from by Anheuser-Busch InBev in 2016 and CVS Health in 2018, respectively.
Several other large M&A deals have also been funded by bond raisings on a par with the ones we are seeing now from big tech. The latest was the US$26bn bond offering from Mars in March to fund its Kellanova acquisition. Kimberly Clark’s US$48.7bn acquisition of Kenvue – announced on November 3 – will be partly financed by debt, so should also result in another chunky offering.
Fourth is the wall of private equity dry powder that needs to be deployed. The recently announced US$55bn buyout of Electronic Arts includes US$20bn of debt from JP Morgan – the largest committed LBO financing on record – but that will eventually be partially recycled into high-yield bonds and leveraged loans.
Stuffed shirt
Finally, there’s a view that jumbo investment-grade corporate issues are the “cleanest dirty shirt”, to reuse an old quote from bond king Bill Gross – that is, a relatively safe asset when there is a lack of alternatives. With government deficits likely to continue at near record levels and, at the other end of the spectrum, high-yield bond spreads not reflecting any risk of an economic downturn, these jumbo corporate issues from large investment-grade issuers are seen as safe-haven trades.
Add to this the stronger flows into active bond managers, certainly relative to their equities cousins, and the fact that the fast-growing passive bond funds don’t play in the new issue process, and active bond managers have shown huge interest in these larger deals.
Demand for recent jumbo big tech corporate bonds was above market expectations. Meta’s October raise in its own name came in six different tranches with a wide spread of duration from five years out to 40 years. Alphabet’s November bond raise came in eight tranches with durations from three to 50 years. In both cases, the longest durations priced at lower-than-expected spreads.
Needing a home
So what can upset the jumbo corporate bond issue applecart?
An economic downturn – or more cockroaches in the private credit stable, to borrow from JP Morgan CEO Jamie Dimon – is an obvious risk. Another is a major private equity asset running into trouble and leaving bondholders with large losses.
But at least for AI-related issuance, the underlying strength of big tech companies' cashflow is fundamentally different to that of previous eras. There is a huge amount of money looking for a home and many have decided there’s no better place to put it.
Rupak Ghose is a former financials research analyst