Companies borrowed a record $207 billion during August, the highest value of debt issuance ever recorded according to a September 15 Moody’s Analytics Capital Markets Report.
August’s borrowing binge reversed the slowdown in debt issuance for 2016. In the run-up to August, debt issuance for the year had been running behind last year’s total but since Brexit, corporates have taken the plunge, deciding to make the most of low-interest rate before central banks begin to tighten monetary policy.
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As of September 9, year-to-date US dollar-denominated corporate and financial bond issuance amounted to $1.3 billion, within 1% of the comparable period from one year prior. Back in March, bond issuance was trailing the prior year’s volume by as much as 21%, during an uptick in risk aversion.
Companies borrowed as Interest rates are close to record lows
It seems that companies are attracted to the low rate of interest available on the investment grade and high yield markets at the moment.
The yield on Moody’s Long-Term Corporate Bond Index was 3.8% at the end of last week, within 20 basis points of the lowest monthly average yield since 1956. As it is unclear when the Federal Reserve will decide to hike interest rates again, it would appear that companies are looking to take advantage of this yield trough while investors are still eager to snap up credit at any cost. Of the $207 billion in debt issued during August, $171 billion was rated investment-grade and $36 billion was high-yield. Both of these totals were also records for their respective categories.
It wasn’t just dollar-denominated debt that had a record August. Debt issuance in all major currencies peaked last month. Corporate sterling issuance totaled the nearly two-year high of $11.3 billion in August, far greater than the average of $3.8 billion over the previous twelve months. Meanwhile, $20.3 billion worth of yen-denominated corporate bonds were issued during July, the most in seven years. HSBC recently issued the largest samurai bond deal since 2009, worth $1.8 billion.
In mainland Europe the situation appears to be completely out of control. Henkel AG and Sanofi SA recently became the first nonfinancial corporations to issue debt with negative yields in euros. The average 0.69% euro investment grade yield in the Barclays index is just 10 basis points above the record low and a staggering 223 basis points below the yield on US dollar investment grade corporate bonds.
Companies borrowed record amounts – Living on borrowed time?
Debt may be cheaper than ever but it’s still debt and after the record August borrowing binge, Morgan Stanley estimates that US investment grade corporations have taken debt-two-earnings to an all-time high. Morgan Stanley estimates that US investment grade corporations had an aggregate 2.4 debt-to-earnings ratio, up from the cyclical low of 1.7 at the beginning of the recovery.