By Mike Cherney
Investors a re scooping up U.S. corporate bonds at a record
first-quarter pace, as companies tap the market to finance a wave
of big health-care acquisitions.
Investment-grade and junk-rated companies combined have sold
$438 billion of new bonds this year through Tuesday, according to
data provider Dealogic. That tops the $384 billion of deals at this
time in 2013, which previously had the most bond sales for the
period. Bond sales related to corporate takeovers are roughly $87
billion, an all-time high for a start to the year.
The deal volume shows how investors are willing to bet on
corporate bonds even as the Federal Reserve plans to begin lifting
interest rates from near zero. Higher rates typically push down
prices of existing bonds. Meanwhile, companies are eager to lock in
low borrowing costs.
The surge is a "combination of investors willing and wanting to
participate, and issuers seeing the debt markets as a very
attractive way to finance the acquisitions they want to do," said
Mark Bamford, global head of fixed-income syndicate at Barclays.
"The transactions have been overwhelmingly well received by
investors."
The four biggest U.S. corporate-bond sales tied to acquisitions
have come from health-care firms this year, reflecting an increase
in deal making as companies seek to expand their businesses.
Actavis PLC raised $21 billion for its purchase of Allergan Inc.,
Valeant Pharmaceuticals International Inc. raised $10.1 billion to
buy Salix Pharmaceuticals Ltd., Merck & Co. raised $8 billion
to buy Cubist Pharmaceuticals Inc., and Zimmer Holdings Inc. raised
$7.7 billion to buy Biomet Inc.
The $21 billion bond sale from Actavis ranks as the
second-biggest global corporate bond on record after Verizon
Communications Inc.'s $49 billion offering in 2013.
Tessa Hilado, chief financial officer for Actavis, said the
company received investor orders for more than four times the bonds
available. "You don't really know what the demand is until people
start placing their orders," she said. "I would say we were
pleasantly surprised."
Overall, the first quarter this year is already the
second-busiest on record for U.S. corporate-bond sales, running
behind only the second quarter in 2014, when companies sold $455
billion of bonds, according to the Dealogic figures. The previous
first-quarter record was set last year, when $409 billion was
sold.
Even amid ample supply, U.S. corporate bonds have performed
well. Debt from highly rated companies have returned 2.57% for the
year through Tuesday, according to Barclays data, reflecting price
changes and interest payments. That tops the 1.81% return for U.S.
Treasurys.
"I can't see anything on the radar that's going to slow things
down materially," said Brandon Swensen, co-head of U.S. fixed
income at RBC Global Asset Management, which oversees $44 billion
in the U.S. and has been buying new corporate bonds. "We think
rates are going to remain low."
Last week, bond markets rallied when the Fed said economic
growth had "moderated somewhat" and indicated some hesitancy in
raising benchmark interest rates.
U.S. Treasury yields have fallen over the past 15 months, as
investors flocked to haven assets amid concerns about global
economic growth and geopolitical tensions. U.S. corporate bonds are
pegged to Treasurys, so lower Treasury rates mean companies pay
less interest on their bonds. A 10-year Treasury note was yielding
1.92% late Wednesday in New York, down from about 3% at the end of
2013.
Samantha Palm, a portfolio manager who oversees the $196 million
Parnassus Fixed Income Fund, has been buying newly issued corporate
bonds, in part because of her view that companies will benefit from
a growing U.S. economy. Her fund has more corporate bonds than its
benchmark index and has been focusing on debt of health-care
companies.
"You've got an aging population and a growing, global middle
class all going to be demanding more health-care options," Ms. Palm
said.
To be sure, a boost in benchmark rates from the Fed later this
year would increase corporate-borrowing costs and could slow the
pace of bond sales. But if the pace continues, it would be the
fourth record-setting year in a row for U.S. corporate-bond sales,
based on Dealogic figures.
"The Fed is now becoming more explicit about the desire to raise
rates at some point in the future," Ms. Palm said. "Companies see
this as possibly the last opportunity this cycle to issue at
exceptionally low rates."
Write to Mike Cherney at mike.cherney@wsj.com
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