After companies built up commercial paper borrowings over the last few months amid choppy conditions in longer-term credit markets, many are looking to term out that debt in the US corporate bond market, a factor that could drive bond issuance in the second half of the year, market participants said.
Since the end of March commercial paper balances have increased 13.9% to nearly US$1.18trn on August 10, according to the Federal Reserve. This rise comes in part from a growing number investment-grade issuers that have opted to tap this market for short-term debt – usually with maturities of one to 270 days – rather than issue bonds, as they wait for the longer-dated markets and interest rates to stabilize, people familiar with the trend said.
“Commercial paper is an alternative that issuers could consider as they wait for better market conditions to issue bonds,” said Rich Testa, head of investment-grade finance at MUFG.
Companies are already starting make the shift back to bonds as rallying credit spreads and a decline in long-term Treasury yields in August lifted the floodgate on issuance. Utility Duke Energy printed a US$3.2bn bond on Monday, and said it could deploy the proceeds to pay down the US$4bn of commercial paper it carried on its balance sheet as of July 29. On the same day, Sherwin-Williams printed a US$1bn two-part bond for a similar use.
And if the trend continues, it could add to volume in the second half of the year, which many had expected to be subdued.
Commercial paper is unsecured debt largely issued by highly rated companies and banks to cover temporary deficits in cash flows and meet working capital needs. As such, these investment-grade companies will continue to use it as part of their regular arsenal of financing options.
Nonetheless, the use of commercial paper to fund more substantial capital expenditure is expected to wane, especially now that the yield curve is inverted, making borrowing on the short end more expensive.
"They'll probably look to term that out because I think the optionality of issuing extremely short paper is running out as we get more Fed hikes," said Natalie Trevithick, head of investment-grade strategy at Payden & Rygel.
The Treasury yield spread between two-year and 10-year benchmark notes was a negative 41bp on Thursday.
None of this means, however, that the US$143.3bn increase in outstanding commercial paper since the end of March will completely or mostly be termed out in the bond market. Instead, much of it will be allowed to mature and roll off the balance sheet, market participants said.
“It does not always equate to a one-for-one swap,” said Robert Danziger, managing director of US investment grade syndicated loans at MUFG.