Businesses expect financing to stay cheap, despite looming rate hikes


Many U.S. CFOs secured cheap financing for their businesses in 2021, and expect similar terms in 2022, although the Federal Reserve’s expected rate hikes are prompting companies to refinance some maturing debt in the next few years. .

The Fed’s monetary stimulus, coupled with strong investor demand for bonds, equity issues and other financing instruments, have provided corporate finance executives across industries with good access to capital markets in 2021. Companies, however, did not have the same urge to fundraise as they did in 2020, during the early months of the Covid-19 pandemic.

In 2021, the volume of bond issuances by US investment grade companies reached $ 1,079 trillion, down 28% from the record $ 1,491 billion raised in 2020, although it remains higher than the $ 965.04 billion raised in 2019, according to Refinitiv, a data provider. .

U.S. companies sold $ 402.55 billion worth of bad bonds in 2021, up 11% from 2020 and nearly double the amount they raised in 2019. Share issues, at 377, $ 38 billion, increased 4.2% in 2021 from 2020, Refinitiv said.

Bankers and advisers predict another busy year for corporate borrowing as companies look to lock in low rates or secure funds for planned mergers and acquisitions. However, a slowdown in the pace of the economic recovery in the United States, faster-than-expected rate hikes by the Fed, new variants of Covid-19, or a drop in M&A deals could weigh on demand for capital. enterprises.

In December, Fed officials forecast increases of at least three-quarters of a percentage point in 2022 from its current benchmark close to zero interest rate. They also approved a plan to end an asset purchase program in March instead of June, opening the door for the U.S. central bank to start hike rates in mid-March.

“We expect borrowers to prefer borrowing sooner rather than later given the recent acceleration in the pace of Fed debt reduction and the subsequent expectation of rate hikes,” said Jeanmarie Genirs, director of Deutsche Bank. . AG

American Investment Grade Syndicate.

U.S. investment grade companies have about $ 656 billion in bonds maturing in 2022, $ 698 billion in 2023 and $ 644 billion in 2024, according to Refinitiv.

Refinancing terms are likely to remain attractive, said Marc Fratepietro, co-head of the global investment grade debt capital markets division at Deutsche Bank. Many bonds maturing in the next few years have coupon rates of 3.5% or more, meaning that “there is a substantial margin for rates to rise before refinancing becomes more expensive.” , said Fratepietro.

The average interest rate on high-quality debt securities sold by U.S. companies in 2021 was 2.396%, up from 2.849% in 2020 and 3.277% in 2019, Refinitiv said. For junk bonds, the average coupon rate in 2021 was 5.277%, compared to 5.995% in 2020 and 6.193% in 2019.

Cintas Corp.

, a Cincinnati-based provider of uniform rentals and other services, is among the companies looking to refinance some of their debt. The company has around $ 1.1 billion in short-term debt maturing in 2022, with one tranche maturing in early April, followed by another in June. The company has already frozen interest rates on these two tranches, said chief financial officer J. Michael Hansen. “We know the rates at which we are going to issue,” he said. Even if the Fed raises rates, they remain at historically low levels, he said: “It’s still a great environment today.”

Campbell Soup Food Manufacturer Co.

potential rate increases are not a major concern. “I don’t think this significantly changes our overall perspective on the right level of debt,” CFO Mick Beekhuizen said.

The company has reduced its debt in recent years and plans to refinance its upcoming maturities instead of paying off debt, “which we would have done in the past,” Beekhuizen said. Campbell has approximately $ 450 million in debt maturing in August 2022, followed by approximately $ 566 million in March 2023, according to S&P Global Market Intelligence, a data provider.

Companies that sell junk bonds continue to lengthen their debt maturities, said Dick Smith, head of leveraged capital market activities at Mizuho Americas. “A lot of CFOs are taking advantage of these low rates, these low spreads and pushing back their refinancing deadlines,” he said, adding that companies are also reportedly looking to revalue loans.

Movie theater operator AMC Entertainment Holdings Inc. said Monday it plans to refinance some of the high-interest debt it has taken on to survive the pandemic, in a bid to reduce its exposure to rate hikes. interest, delay deadlines and relax restrictive covenants.

DigitalBridge Group Inc.,

a private equity firm that invests in data centers and cell phone towers, plans to lower its financing costs, said chief financial officer Jacky Wu. “We should be able to tap the market and swap some of our higher cost of capital, like our preferred shares, ”Wu said. The company pays less than 4% interest on some of its debt, he said.

Mergers and acquisitions are expected to remain a driving force for corporate fundraising, the bankers said. Many quality companies in recent quarters have reduced their leverage, said Jim Shepard, head of investment grade debt capital markets activities at Mizuho Americas. “They also have a lot of cash on the balance sheet and a valued inventory” to pursue acquisitions, he said.

Hormel Foods Corp.

, the spam maker, agreed in 2021 to spend $ 3.35 billion on Kraft Heinz Co.

nut business. The Austin, Minnesota-based company, which froze some rates earlier, has set an average 1.6% interest rate with its bond investors, said Jim Sheehan, who recently retired. as financial director of Hormel.

“The financing terms are very attractive,” said Mr. Sheehan.

Write to Nina Trentmann at [email protected]

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