Corporate issuance further pressures longer-term Treasury yields, amid expectations of bad inflation “surprises.” Share buybacks getting a lot more expensive, but no problem either.
By Wolf Richter for WOLF STREET.
Why would corporate giants suddenly pile into the corporate bond market with large-scale new issuance in September at these high interest rates? Why not wait for that Fed pivot and rate cuts that must be coming any moment, no?
Because they want to lock in these interest rates that they can still get, before rates rise even further. These companies are not betting on rate cuts. A year ago, they bet on rate cuts that didn’t come. Now they bet on higher for longer – on higher inflation and higher long-term interest rates for longer – and they’re issuing bonds at a red-hot pace in September before rates go even higher.
Today’s shining example is T-Mobile US [TMUS] which announced that its wholly-owned subsidiary T-Mobile USA, plans to sell a pile of new debt, with the amounts and rates still left blank in the filing. According to sources cited by Bloomberg, the senior unsecured notes would amount to $2 billion, including unsecured senior notes with 10-year and 30-year terms.
The 30-year notes, due in 2054, are expected to price at about 1.63 percentage points above Treasury securities, according to Bloomberg, citing sources familiar with the deal. A spread of 1.63 percentage points would price the bonds at a yield of around 6%!
A survey of investment bankers who underwrite corporate debt sales forecast $120 billion of US debt to be issued in September, according to Bloomberg.
That would be about 34% higher than in September 2022, when $89 billion in investment grade debt was issued, according to SIFMA (Securities Industry and Financial Markets Association).
Today’s 10-year Treasury yield, at 4.30%, is a full percentage point higher than last year’s at this time. But it’s at these much higher yields this September that debt issuance is taking off.
On Tuesday after the Labor Day weekend, at least 20 investment-grade companies sold over $36 billion in new debt in the US, the biggest day this year, ahead of May 16 ($33 billion) and January 3 ($34 billion), according to Bloomberg.
Companies that issued bonds in the US after Labor Day included big deals by BHP Billiton with $4.75 billion of senior unsecured notes in a five-part deal, including 30-year notes; and Philip Morris International with $2.35 billion of senior unsecured notes, whose longest-dated portion were 10-year notes.
And in September 2022, there was hesitation by companies in issuing new debt as everyone was waiting for the Fed to slash rates again. Today, this scenario appears to be on the back burner, and companies are locking in the rates they can get now for the long term, including for 30 years.
“I would expect companies to be trying to get ahead of any economic data that sends US Treasury yields higher,” Winnie Cisar, global head of credit strategy at CreditSights, told Bloomberg. “I think we will see a front-loaded issuance month.”
All eyes are on the upcoming CPI report on Wednesday, and everyone knows it’s going to be a bad “surprise,” with more bad inflation surprises to be followed later in the year. We’ve outlined these coming second-half “surprises” back in August and in July: The base effect, energy prices that bounced off the steep plunge, and the end of the ridiculous 12-month-long adjustments to health insurance CPI, in addition to other elements that add heat to the inflation numbers. And the core services PCE price index, which the Fed keeps a close eye on, has already shot higher. Those inflation “surprises” could drive Treasury yields higher.
So now is a good time to sell lots of debt to front-run the risk of even higher rates later? Even if the Fed maintains its short-term policy rates, long-term yields will be under pressure from the tsunami of issuance by the Treasury Department, the pileup of corporate bond issuance, and this scenario that inflation and long-term yields will be higher for much longer.
T-Mobile joined the crowd, locking in the current rates before they go even higher. The company had $6.6 billion in cash at the end of June, and $76 billion in short and long-term debt.
Moody’s today rated the unsecured notes Baa2, which is in the lower segment of investment grade, two notches above junk (my cheat sheet of corporate bond credit ratings).
Fitch today rated the notes BBB+, three notches above junk, and expects EBITDA (earnings before interest, taxes, depreciation, and amortization) – a measure of cash flow – to increase “to more than $30 billion by 2024 which offsets increased debt due to spectrum acquisitions and share repurchases.”
The company said in the filing that it intends to use the net proceeds from the debt sale “for general corporate purposes, which may include among other things, share repurchases, any dividends declared by Parent’s Board of Directors, and refinancing of existing indebtedness on an ongoing basis.” It’s also expanding its 5G network.
In July last year, T-Mobile, which had long been junk-rated, was anointed with a first investment-grade rating, and by August all three major US ratings agencies rated it investment grade, and has been upgraded since then. In terms of taking on debt, the investment-grade rating was manna from heaven.
The company is a relative newcomer to share buybacks, but now as an investment-grade company, it’s massively into it. It started in Q3 2022. Over the past four quarters through Q2, 2023, T-Mobile blew $11.2 billion in cash on share buybacks. In September 2022, the company had authorized $14 billion in share repurchases through Q4, 2023. Last week it announced an additional $19 billion in a “shareholder return program,” including dividends. And this program could reach up to $60 billion, depending on additional authorizations by 2025.
And now it’s borrowing at rates at up to 6% to buy back its own shares. This follows a pile of debt issuances in May, when it sold $3.5 billion in new debt. A $1.25 billion portion of this debt were 30-year notes, due in 2054, that were priced at a yield of 5.75%. Rising interest rates no problem.
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