Companies Give Up Cash Cushions to Buy Back Debt
By Anna Hirtenstein
Companies in the U.S. and Europe are buying back bonds to reduce
the cash piles they built up earlier this year, signaling
expectations for more stable economic times ahead.
Telecom company AT&T Inc., beer brewer Anheuser-Busch InBev
SA and oil major BP PLC are among the firms redeeming debt early
after determining that the billions of dollars and euros they
raised in response to the turmoil in markets earlier this year
isn't likely to be needed.
"The world still isn't perfect, but there's more visibility. A
lot of companies who have overfunded, they sat there after a few
months and said we don't actually need all of this money," said
Frazer Ross, a regional head for Deutsche Bank's investment-grade
debt syndicate. "It's like they took out an insurance policy, but
now it's too costly."
This year has seen a 40% rise in the value of bonds bought back
early by investment-grade firms in the U.S. and a 50% increase in
the region that includes Europe, the Middle East and Africa,
compared with last year, according to research from Deutsche
Corporate debt issuance hit an record high in 2020, data from
Dealogic showed. In the U.S., firms tapped the bond market for
close to $1.5 trillion through September. Companies in Europe
raised EUR486 billion, equivalent to $573 billion. Many firms
rushed to set aside the money as a cushion, in anticipation of a
prolonged disruption to their operations during the pandemic.
AB InBev issued seven bonds in April, raising over $11 billion,
according to FactSet. British American Tobacco PLC sold 11 bonds in
the second and third quarters for close to $9 billion. As oil
prices fluctuated the most in six years, BP raised over $20 billion
But in Europe's ultralow interest rate environment, sitting on
excess cash is expensive. The eurozone has had negative interest
rates since 2014 and the policy rate is currently set at minus
0.5%. The Bank of England has its benchmark rate set at an record
low of 0.1% and is also considering cutting it below zero. That
means companies that raised capital from bond sales are often
having to pay to keep the cash at their European banks while also
disbursing coupon payments to debtholders.
"This liquidity amount was higher than we require to manage our
business, even in times of elevated volatility," said Fernando
Tennenbaum, chief financial officer of AB InBev. "We will continue
to proactively manage our upcoming liabilities as we monitor the
evolving market environment."
His company has undergone two rounds of bond redemptions in the
third quarter amounting to a total of $11.5 billion. This includes
both tender offers to buy back its outstanding debt and exercising
call provisions, which are a clause that allow an issuer to pay off
In the U.S., the Federal Reserve has also cut rates, but not
that low. While companies may not have to pay to store it, holding
on to excess cash unnecessarily still isn't considered to be an
optimal use of capital, analysts said.
There have been recent signs of the economic rebound slowing
around the world. A gauge of the health of the eurozone's services
industry through purchasing managers' indexes contracted last
month. In the U.S., the recovery in the labor market showed signs
of decelerating with last Friday's jobs numbers coming in below
Despite this, credit markets have remained relatively stable due
to central bank action. The European Central Bank recently ramped
up its purchases of corporate debt. The Fed is set to release
minutes on Wednesday from its meeting last month after which it
signaled an intent to keep rates low for years.
"The thinking by a lot of companies is that they can always
raise money again later, if things get bad again," Mr. Ross said.
"Central banks are expected to keep borrowing costs low."
Write to Anna Hirtenstein at email@example.com
(END) Dow Jones Newswires
October 06, 2020 10:40 ET (14:40 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.