By Vipal Monga
Companies reaching for better returns on their cash have found a
new favorite investment--other companies' bonds--and they are
loading up.
Cash-rich companies like Apple Inc., Oracle Corp. and Johnson
& Johnson are snapping up corporate bonds sold by highly rated
companies such as Verizon Communications Inc. and Gilead Sciences
Inc.
More than half of corporate cash held by U.S. companies this
August was invested in investment-grade corporate bonds, a record,
according to investment-software company Clearwater Analytics.
Meanwhile, treasurers have reduced their companies' holdings of
more traditional investments such as U.S. Treasurys, commercial
paper and bank certificates of deposit.
Companies are betting highly rated corporate bonds are safe
repositories for cash that will pay higher rates than more
traditional bank deposits or money-market funds. But they are also
increasing the risk to an asset where principal protection is the
priority.
If interest rates rise quickly, the value of their
lower-yielding existing bonds could plummet. A major market
disruption could also make it difficult for companies to sell their
holdings if they need the cash. Either could lead to write-downs or
actual losses if they sell at lower prices than they paid.
For now, treasurers are figuring the bet isn't that risky.
Companies' balance sheets are in good shape, and buyers are
focusing on bonds that mature within five years, which carry lower
risks than bonds that take longer to mature.
Still, the past offers plenty of examples of companies that got
burned when reaching for yield. Procter & Gamble Co. lost more
than $100 million after it bought derivatives from Bankers Trust
Co. in 1993 in an unsuccessful bet that interest rates would remain
low. MetroPCS Communications Inc. wrote down millions in
investments in 2007 because it invested in auction-rate securities
and couldn't sell the holdings. Even mainstream investments can
have hiccups in tough times. After Lehman Brothers Holdings Inc.'s
2008 collapse during the financial panic, Goodyear Tire &
Rubber Co. was forced to borrow $600 million from its credit lines
because it couldn't access cash trapped in locked money-market
funds.
"To get more return, you have to take more credit risk," said a
treasurer at a large technology company that has actively been
buying corporate bonds.
Aggressive buying by their peers is one factor that has spurred
U.S. companies to issue enormous quantities of debt. As of Sept.
24, issuance of investment-grade corporate debt including financial
borrowers hit $1 trillion in 2015, on pace for a record year,
according to data tracker Dealogic.
One frustration for treasurers is short-term interest rates that
have remained near zero since late 2008. Adding to that is a bevy
of regulations that have made it more difficult for them to park
money in bank accounts or money funds.
New banking rules by the Federal Reserve have made it more
expensive for banks to hold large corporate deposits. As a result,
they are discouraging companies from socking too much money away in
their accounts.
New Securities and Exchange Commission rules could make
money-market funds less attractive by forcing them to abandon their
$1 share price and allow them to impose fees on shareholders for
withdrawing assets or suspend redemptions temporarily to thwart
panic selling.
That makes treasurers' less confident that they will get all
their money back, and have access to their money, in a crisis. The
rules won't take effect for another year, but treasurers are
already turning elsewhere.
"There's really no other game in town," said Ben Campbell, chief
executive officer of Capital Advisors Group Inc., which advises
companies on their cash- management strategies.
The biggest corporate investors in bonds come from the
technology and pharmaceuticals sectors, where companies have cash
to spare.
iPhone maker Apple, for one, held almost $100 billion worth of
corporate bonds at the end of June. That was a 25% increase from
the end of its 2014 fiscal year, representing almost half the cash
and cash equivalents on its balance sheet. The total is also almost
equal to the value of bonds issued in June this year.
Oracle, the business-software maker, held $28.9 billion in
corporate debt at the end of May, 73% more than a year ago. The
bonds made up 53% of the company's cash and equivalent assets.
Pharmaceutical giant Johnson & Johnson held $3.5 billion of
corporate bonds at the end of June, roughly 10% of its liquid,
financial assets, and a 162% increase from the end of 2014. Rival
Amgen Inc. held $15.9 billion in bonds at end of June, up 22% from
December.
Many of those companies also have much of their cash in Europe,
where rates are even lower than in the U.S. With few places to put
it, and unable to bring the funds home without paying U.S. taxes,
the corporations are investing in the bond market, said one banker
who has sold bonds to companies.
"They've gone from an infrequently seen but nice-to-have
participant to a very commonly seen participant," the banker
said.
Borrowers say companies are playing big roles in some large
transactions. When Verizon issued the largest bond on record two
years ago to fund the takeover of Vodafone Group PLC's share of
their U.S. wireless joint venture, many "large companies" helped
take down the $49 billion in securities, said Fran Shammo, the
company's finance chief. He declined to name them.
Earlier this month, corporations were among the bidders for $10
billion in bonds issued by pharmaceutical giant Gilead, a person
familiar with the transaction said.
The corporate buyers have started to make their presence felt in
the market. As their appetite for bonds has increased, prices for
securities with shorter maturities have risen, said John Majoros, a
managing director at Wasmer, Schroeder & Co., which manages
$5.5 billion in assets.
He said his firm has been buying bonds with longer maturities to
get around that competition and hopefully find better bargains.
Home-improvement retailer Lowe's Cos. was able to sell $250
million of bonds maturing in 2018 at full price earlier this month
because of high demand. Conversely, it offered debt maturing in 10
and 30 years at a discount to entice investors. Investors ask for
discounts on securities to boost their yields.
The bond buying is causing companies to act like mutual funds or
brokers, investing cash on behalf of their shareholders, argued
Victoria Ivashina, a finance professor at Harvard Business
School.
"This is a risky business," she said. "Can they get it wrong?
Absolutely they can get it wrong."
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
September 24, 2015 21:01 ET (01:01 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
Johnson and Johnson (NYSE:JNJ)
Historical Stock Chart
From Feb 2024 to Mar 2024
Johnson and Johnson (NYSE:JNJ)
Historical Stock Chart
From Mar 2023 to Mar 2024