Companies leverage bond demand to shore up finances
When Apple issued $5.5 billion in bonds in mid-August, it was just the latest big company to take advantage of low interest rates to raise capital to buy back stock and pay dividends. Google, Amazon and other tech giants were in the bond market last month for that reason, too.
Apple issued four sets of bonds, with the longest maturity bond, at 40 years, yielding 118 basis points over Treasuries, making it an extremely cost-effective capital raise. At spreads of 108 and 130 basis points over Treasuries, respectively, Google and Amazon also benefited from similarly low rates.
Outside of Silicon Valley, though, the rush to sell bonds is for far more workaday reasons.
Many companies tapped their revolving credit facilities in the spring to ensure they had cash to get through the pandemic. Now they're issuing bonds to raise capital to replenish those lines and keep money available to counter any economic headwinds that might be before them.
In all, companies raised more than $900 billion between April and August, more than double what they raised in the same period last year, according to Dealogic data reported by the Journal.
Although bond raises are often more expensive than credit lines, the capital raised is far more flexible; credit lines can come with restrictive covenants that impose performance milestones and other burdens on companies as they tap the funds.
The Federal Reserve's actions at the outset of the pandemic helped fuel the surge. The agency launched a number of funding, credit, liquidity, and loan facilities to encourage companies to access the capital markets. In two of the facilities alone, a primary and a secondary market corporate credit facility, the Fed committed to buying $750 billion in bonds.
So far, demand for the facilities has been small. The primary and secondary market facilities have cost the Fed only a few billion dollars, and the program is set to expire soon. But the facilities helped spur the market by boosting confidence, which was the Fed's main goal.
Sept. 2, 2020