Even debt-prone U.S. energy companies have been focused on the benefits of redemption.
Noble Energy NBL, +1.37% joined the surge of U.S. companies in September locking down ultra-low borrowing rates for decades to come, but without adding to the $9 trillion-plus pile of corporate debt.
The Houston-headquartered oil and gas company raised $1 billion on Tuesday by selling BBB-rated debt, which was evenly split between 10-year paper that priced to yield 3.25% and 30-year bonds at 4.2%.
Rather than buyback stock or fund an acquisition - popular trends in corporate finance in recent years - Noble said that all proceeds from its fresh capital raise would be earmarked to redeem its 4.15% coupon bonds that mature in 2021, through a tender offer that will end September 30.
Duke Energy DUK, -0.41% on Wednesday also plans to borrow $400 million for 30 years in the bond market, while marking its proceeds to repay a series of tax-exempt bonds, a short-term intercompany loan and for general corporate purposes.
“Literally, we get notices of corporate tenders everyday now,” said Karissa McDonough, chief fixed income strategist at People’s United Advisors, in an interview with MarketWatch.
“I think a lot of the escalation in tender activity is coming from CFOs looking at the volatility and thinking: We don’t have to get it perfectly right, but there is a window. Let’s just go for it.”
Analysts at Bank of America Merrill Lynch dubbed the trend “redemption time” in a Tuesday note to clients, which spelled out why investment-grade U.S. companies have added only $43 billion to their outstanding debt in September, even while issuing more than $150 billion of new bond supply.
This chart shows each month of U.S. high-grade bond supply for 2019 and how much funded redemptions.
Analysts at Bank of America said they expect more of this type of “liability management” activity in “the coming months while interest rates are still relatively low.”
Easy credit over the past decade has fueled a boom in corporate debt, which in the second quarter reached a record $9.4 trillion, according to data from the Securities Industry and Financial Markets Association.
Red flags have been raised about mounting risks in the sector, including the potential for fallout from the record $3 trillion-plus BBB-rated bracket of investment-grade corporate debt, which sit on the cusp of being considered “junk-rated” credit.
Federal Reserve Governor Lael Brainard on Wednesday underscored the concerns the central bank has around corporate indebtedness in testimony before the House Financial Services Subcommittee on Consumer Protection and Financial Institutions.
Brainard warned that “excesses in corporate debt markets could amplify adverse shocks and contribute to job losses,” while pointing out that rising delinquencies and defaults can crimp the amount of credit that banks are willing, or able, to offer.
“This dynamic feeds on itself, potentially amplifying downside risks into more serious financial stresses or a downturn,” she said, according to a transcript of the testimony.
Fortunes of energy companies can be more volatile than other types of corporations, since they often are tethered to the whims of commodity prices. Such pitfalls came into sharp relief five years when oil took a sustained plunge below prior highs of more than $100 per barrel and left a rash of debt-laden oil firms in default.
Yet, Noble was able to secure 30-year financing this week at less than 4.5%, in part due to the dearth of options for investors fleeing the more than $15 trillion of global debt now offering negative yields.
“You are buying a commodity entity with all the attendant swings,” McDonough said. “You might feel really good about it, or it might be there is no alternative.”
Oil futures lost ground Wednesday as domestic crude inventories climbed for a second week in a row. West Texas Intermediate crude for November delivery CLX19, -1.24% fell $1.45, or 2.5%, to $55.84 a barrel on the New York Mercantile Exchange, while November Brent crude BRNX19, +0.10%, the global benchmark, was off $1.33, or 2.1%, at $61.79 a barrel on ICE Futures Europe.
Meanwhile, corporate bond issuance has been robust in September, even with elevated market swings since early August when the U.S.-China trade-war escalated.
Corporate bonds price at a premium to U.S. Treasurys and fluctuations in the underlying benchmark can make it trickier for borrowers and investors to agree on the right “spread,” or level of compensation, new bonds should offer.
The 10-year Treasury TMUBMUSD10Y, +4.56% was trading Wednesday at 1.692%, more than 20 basis points from its recent closing low of 1.456% at Sept. 4, according to FactSet data. The 30-year yield has also gained around 20 basis points from a recent low to trade at 1.694%.
U.S. stocks were steady Wednesday, with the S&P 500 index SPX, +0.62% up 10.5 points, or 0.35%, to 2,977, despite uncertainty around a potential path to a U.S.-China trade deal and the launch of a Congressional impeachment enquiry against President Trump.
Additional reporting by Sunny Oh