Credit Markets Recover, but Proceed With Caution
February 27, 2009, 5:32 pm
Credit Markets Recover, but Proceed With Caution
Posted by Heidi N. Moore
Companies have been issuing bonds in record amounts for two months in a row, indicating that the corporate credit markets are working again. But, in many cases, the reason is that companies are approaching them like a war zone: gingerly and methodically, leaving little room for failure.
Naturally, companies with the highest investment-grade credit ratings have benefited most, raising $549 billion from the sale of bonds this year, more than double the year-earlier volume of $245 billion.
January and February were the most active months for investment-grade corporate bond issuance among American companies since 1995, according to Dealogic data. (Dealogic excludes bond sales from the financial sector, which issues debt every day and tends to skew issuance numbers.) In February, companies raised $141 billion by selling investment-grade bonds; in January, it was a 14-year high of $161 billion. The most recent months to even approach such volume were April and May 2008, when investors bought $101 billion and $122 billion of investment-grade bonds, respectively.
Bonds aren’t only getting strong demand, but strong performance, too. The $16 billion of bonds Roche Holdings sold last week to finance its hostile offer for Genentech has since increased $515 million in value, according to Bloomberg data.
Of course, there still is distress in the bond markets. A record number of ratings downgrades affected nearly $900 billion of U.S. corporate bonds in 2008, Fitch Ratings data show, or 24% of the entire market in U.S. bonds.
As a result, the most successful bond sellers have approached the debt markets gingerly. Pfizer secured a $22.5 billion bridge loan from several investment banks for its acquisition of Wyeth, then quickly went on the road to market bonds that would refinance the loans before the credit markets closed. While Roche launched a one-week offensive directly to potential bond investors in order to avoid having to borrow money from already-squeezed banks.
Still, Dow Chemical has said it can’t complete its $15.3 billion acquisition of Rohm & Haas until it can finds enough financing to replace a $13 billion bridge loan it had arranged and so far that hasn’t happened, though it is in talks with its lenders.
And a good example of companies’ caution is Agrium, a fertilizer company that launched a $3.6 billion hostile bid this week for rival CF Holdings. Agrium is funding the cash-and-stock bid with a combination of $1.4 billion in bridge loans from the Royal Bank of Canada and the Bank of Nova Scotia and term loans. Usually, bridge loans are eventually refinanced through bond sales.
Agrium’s bid required that CF disrupt its own $2 billion hostile bid for another rival, Terra Industries. Agrium’s hostile bid might have been stronger if it had been launched 12 days earlier, in time to try and oust CF’s board. But Agrium, which had been quietly planning an offer for CF for months, delayed until its financing was fully in hand, according to investors briefed on Agrium’s plans. Agrium executives told investors this week that the company wanted to do such a big deal the right way–and that included planning the financing well before announcing the deal.
Such advance planning is welcome to skittish bond investors. But one has to wonder why more companies were as cautious when they were piling on debt during the credit boom.
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