Corporate borrowers are switching up the composition of their
debt sales, throwing more floating-rate notes into the mix to
entice investors who believe interest rates may be about to rise
sooner and faster than expected.
Nearly $26 billion, or 23%, of the investment-grade bonds
marketed in the U.S. so far this year have had floating rates,
according to data provider Dealogic, making it the busiest January
for so-called floaters since 2007. That compares with $57.4
billion, or 7% of the supply, for all of 2010.
Bankers expect to see more floaters this year for two reasons:
Issuers are suddenly comfortable selling them; and investors are
eager to buy them to position their portfolios for a potential rise
in rates.
"People have had the view for the last year, or year and a half,
that short-term rates aren't going higher any time soon, and that
is not an environment where you think you can make money on
floating-rate debt," said Jim Merli, head of debt origination and
syndicate at Nomura Holding Americas Inc.
"Now that is starting to change," Merli added, "because there is
stronger economic data, and other central banks outside the U.S.
are making noises about raising short-term rates."
Data over the last few months have been supportive of a more
bullish outlook on the economy, with more job creation, a rising
stock market, and strong corporate earnings over the past two
weeks.
"While there are certainly headwinds like unemployment and weak
wage gains, the data is far more balanced and the growth camp seems
to have the scales tipping in its favor," said David Ader, head of
government bond strategy at broker-dealer CRT Capital Group.
To be sure, floating-rate deals account for only a fraction of
the market share they had in the middle of the last decade, and the
volume outstanding has fallen by 40% since end of 2007 to $428.9
billion now. But issuers are warming up to them again.
Financial institutions tend to be the biggest issuers of
floating-rate debt, to bring their funding in line with assets such
as floating-rate loans. Financial firms, including insurers as well
as banks, have accounted for 63% of the U.S. high-grade issuance in
dollar volume so far this year, the highest percentage for any
January since at least 1995, when Dealogic started keeping
records.
About 57% of that total was from banks, although units of
non-financials like brewer Anheuser-Busch InBev SA/NV and energy
giant Total SA have recently issued floaters, too.
AB In-Bev's strategy of pairing fixed- with floating-rate debt
was "a function of the expected long-term recovery of the economy
versus the short-term opportunity to benefit from historically low
rates," said Scott Gray, director of global funding and financial
markets at the company in New York.
Johnson Controls Inc. was in the market Tuesday with $350
million of three-year floating-rate notes as part of a $1.6 billion
deal.
Heavy issuance by foreign banks has also contributed to the rise
in these securities. They borrow in the U.S. because investor
appetite is stronger here than in their domestic markets. January
saw the largest volume of these so-called Yankee
deals--dollar-denominated bonds sold by foreign firms in the
U.S.--than any other month on record.
"Since the euro markets were less friendly to new issuance,
floater deals that would normally have come as euro bonds were
instead dollar issues," said Guy LeBas, chief fixed income
strategist at Janney Capital Markets in Philadelphia.
Most of the floating-rate debt sold this year has been clustered
around two- and three-year maturities, as was the case in 2009.
Last year's issuance was more evenly spread between three-, five-
and 10-year floaters, helping to stem the pace at which maturing
debt exceeded new supply.
There is about $32 billion of floating-rate, Federal Deposit
Insurance Corporation-insured bonds under the government's
Temporary Liquidity Guarantee Program maturing this year, said
LeBas, all of which needs to be refinanced--including $5 billion in
the first quarter.
"Given that all the government-guaranteed debt from 2009 is
maturing in 2011, banks will be able to issue short-term floaters
beyond that maturity cliff," said Justin D'Ercole, head of Americas
investment-grade syndicate at Barclays Capital. "As opposed to the
last two years, when it would have had the effect of adding to
their massive wall of maturities, it now fits into their
debt-distribution profile."
LeBas said while there is marginally greater demand for floaters
based on concerns about rising rates, investors are better off
buying short-dated, fixed-rate debt. If rates rise and the income
on the bond resets progressively higher, an investor would win out
over time only if rates rise enough to offset the lower income in
the early going.
"Rates would have to rise quite rapidly for it to make sense to
accept such a low initial coupon," he said.
Last Thursday, ABN AMRO Bank N.V. sold $2 billion of fixed- and
floating-rate bonds, with the $1 billion of floaters pricing at
1.77 percentage points over Libor, equivalent to a coupon of 2.07%,
and the $1 billion of fixed-rate notes pricing with a coupon of
3%.
"Investors are using these floaters to shorten duration and
express their view on the pace of future Fed tightening," said
Michael Hyman, head of investment-grade credit at ING Investment
Management, who participated in the ABN AMRO deal.
-By Katy Burne, Dow Jones Newswires; 212-416-3084;
katy.burne@dowjones.com