Issuance ‘Wildcard’
“The wildcard for issuance will likely be what rates do during the remainder of the year,” analysts led by Jason Shoup at Citigroup Inc. wrote in a May 17 report. “We fully expect to see companies taking a more aggressive approach to prefunding their 2014 maturities,” capital expenditures and mergers, especially if discussion of the Fed withdrawing stimulus continues, they wrote.
Federal Reserve Bank of San Francisco President John Williams said last week that quickening economic growth and gains in the job market may prompt the Fed in the next few months to start reducing bond buying.
“It’s clear that the labor market has improved since September” when the Fed began its third round of asset purchases, Williams said in a May 16 speech in Portland, Oregon. “We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer” and end the program late this year “if all goes as hoped.”
Refinancing Purposes
Of investment-grade companies selling debt in the U.S. in April, 70 percent specified refinancing among their use of proceeds, 10 percent cited mergers-and-acquisitions activity, 23 percent shareholder payments and 3 percent capital spending, according to Lonski of Moody’s. Use of offerings can fall into more than one category, while the figures exclude sales designated for general corporate purposes.
The number of junk-rated companies that are under liquidity stress was at almost all-time low levels this month as strong investor demand allows firms to shore up cash, according to a May 16 report from Moody’s.
“Most U.S. speculative-grade companies are avoiding liquidity problems despite tepid growth in corporate sales and continued softness in the economy,” Moody’s analysts led by John Puchalla wrote.
The ratings company’s Liquidity-Stress Index, which falls when corporations’ ability to manage cash needs appears to improve and rises when it weakens, is at about an unprecedented low, reaching 3.2 percent in mid-May from a record 2.8 percent at the end of April, according to the report. That compares with an historic average of 7.3 percent.
“Conditions for issuers could not be more ideal,” wrote Shoup of Citigroup. “How much longer the party lasts is the billion dollar question.”