Corporations are buying back bonds at the slowest pace in decades — a sign that they’re waiting to refinance — though this hesitancy could come back to haunt them as maturities pile up and interest rates stay higher for longer.
(Bloomberg) — Corporations are buying back bonds at the slowest pace in decades — a sign that they’re waiting to refinance — though this hesitancy could come back to haunt them as maturities pile up and interest rates stay higher for longer.
Globally, around $76 billion of corporate bonds have been repurchased so far this year, representing the lowest volume of bonds bought back since 2009, and a 40% drop from this time last year, according to data compiled by Bloomberg though Aug. 31. Across North America, just 52 offers to repurchase outstanding debt have surfaced — the least since at least 2000. That translates to $22 billion repurchased, the lowest amount since at least 2008 and a 72% drop from the year-ago period.
Bond buybacks allow companies to repurchase debt through tender offers to bondholders, enabling them to retire some or all of the securities ahead of their due dates. Lately, corporations have been buying back less debt because rates have risen so much. Many would rather keep their older, lower coupon debt outstanding for longer, instead of selling new, more expensive bonds to buy back existing securities.
“A striking feature of the credit market is how unusually low supply has been,” said Viktor Hjort, global head of credit strategy and desk analysts at BNP Paribas SA. “When rate hiking started, companies said, ‘Meh, I don’t want to refinance — we’ll wait and see if things improve.’ But we’re now closer to the maturity walls.”
With fewer borrowers refinancing short-term debt into longer-term obligations, the average maturities of bonds in the US investment-grade and high-yield markets has been getting shorter. The figure’s plunged to an all-time low of just under five years across Bloomberg’s US corporate high yield bond index. The average maturity on an investment-grade bond is about 11 years, close to the lowest since 2018, Bloomberg-compiled data shows.
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In the US junk market, there have been only 16 tender offers this year — the lowest since at least 2000 — and about 45% lower than this time last year. That’s resulted in about $4 billion of volume bought back — also the lowest since the turn of the century, and an 80% drop year-over-year.
“For liability management, it’s definitely been a lighter year than the past, just given where rates are,” said Barbara Mariniello, global co-head of debt capital markets at Barclays Plc, who looks closely at the investment-grade market.
In the high-grade market, just 21 tender offers were launched — the lowest since 2019 and a 40% drop from the year-ago period. That adds up to about $13 billion of repurchased high-grade securities — the lowest volume since at least 2014 and a 71% plunge year-over-year.
“I don’t think anybody is anxious to refinance a one- to three-handle coupon in today’s environment unless they have to,” said David Scott, co-head of global debt advisory and capital solutions at BofA Securities.
However, unlike in high-yield, there’s no maturity wall developing in investment-grade, according to BofA. “That’s because although nonfinancial IG companies borrowed less in 2022, that was offset by an earlier robust prefunding of maturities in 2021 to take advantage of the historically low interest rates,” credit strategists led by Yuri Seliger wrote in a Sept. 12 note.
Still, corporate borrowers are becoming more cognizant that rates may stay elevated well into 2024.
“The maturity wall is now a year closer, and issuers face decision time regarding what to do with their debt loads,” wrote BofA credit strategist Oleg Melentyev in a Sept. 15 note. “Higher-quality names will likely choose to delever given their strong ability to generate cash; and lower-quality names have no other way to deal with this but to delever.”
Rebound in Sight
Strategists at Barclays and Bank of America say a rebound in bond buybacks — one of many so-called liability management strategies used by corporates — is coming. The strategy has come into focus lately as the Fed’s aggressive rate hikes put the kibosh on the cheap money era. Fed officials left the benchmark rate unchanged at last week’s meeting while signaling another hike in 2023, and less easing than anticipated in 2024.
“Most people are realizing it’s a higher-for-longer environment, they want to take care of their maturities, and the waiting game doesn’t really make sense,” said Barclays’ Mariniello. “But some of the larger companies who have a lot of liquidity sources may still try and hold out.”
“So, it’s a tale of two cities,” she continued. “It’s about, can you hold out to wait and see, or do you want to bring forward refinancing to de-risk your funding needs?”
Even so, Mariniello says she expects a significant uptick in liability management if and when rates go back down, which she adds could be in the second half of 2024. “This could be the ‘calm before the storm,’ but it’s a matter of when that storm is going to come exactly,” she said. “We absolutely expect more debt tenders before the end of the year. But the ‘storm’ is more of a 2024 story.”
Most bonds in the US investment-grade market are trading below face value, giving companies an incentive to buy them back at a discounted price.
Bank of America also expects liability management activity to eventually pick up. With 63 such deals this year, the bank ranks just behind Citigroup Inc., which has carried out 64 deals, and JP Morgan Chase & Co., which holds the top spot on the leaderboard at 73 deals, Bloomberg-compiled data shows.
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“Within the next five years, the conversation with issuers will look at and strategize about how much debt they want coming due in any given year,” predicts BofA’s Scott. “And with the large towers many are facing in 2024 and beyond, it might make sense and be prudent to start to take some of that refinancing risk off the table, even if it’s at slightly higher rates than what we might have historically seen over the past 10 years.”
“You’re probably going to see higher levels of volume,” he added. “You’re probably going to see people pull refinancing risk forward. But the timing of that is going to be contingent upon the rates markets, what happens with the Fed, among other factors.”
Europe, the Middle East and Africa tells a different story: The region saw 110 tender offers since the start of this year, up by nearly 62% from the year-ago period, Bloomberg-compiled data shows. That’s also the highest number since at least 2012, resulting in $43 billion of total repurchase volume — the most since at least 2016.
Meanwhile, the Asia-Pacific region saw nearly $6.5 billion of repurchases, down 24% year-over-year and the lowest since at least 2019. Latin America saw around $4.5 billion of repurchases, down 63% year-over-year, and the lowest since at least 2015.
–With assistance from Nikolas Strom, Tasos Vossos, Ronan Martin and James Crombie.
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