The race seems to be on for U.S. companies, not only in the amount of debt being issued, but also in how far they can extend the duration.
Low Rates, Long Maturity
Securities Industry and Financial Markets Association data shows that the average maturity for corporate debt skyrocketed to an astonishing 21.3 years this September. This long a duration has not been recorded since the time the Association started keeping records nearly twenty years ago. Looking at it in relative terms, it was a nearly 40 percent jump for the month and a 45 percent increase on average for the last year. Not to mention a 147% increase compared to a decade ago.
Elongating this debt, however, make sense for corporations, as most expect to see the Federal Reserve raising interest rates sometime in the next few months. While the move will eventually increase borrowing costs, making the most of the current, almost zero cost borrowing environment, makes locking in as much debt, for the longest amount of time a sound strategy.
The Year of Debt
The first three quarters have this year have already seen investment grade bond issues topping $978.5 billion, close to the record $1.13 trillion issued last year. Rather surprisingly, high yield issues have also grown in strength reaching $224.3 billion, although they are still 9 percent lower than the total for the same period of 2014.
Numerous companies have been making sure to take advantage of this opportunity, including Actavis which got the second best deal of the year in March with an issue of $21 billion. Three months after that, Reynolds American offered a $9 billion issue, making it the largest consumer product sector offering ever recorded.
Worldwide, jumbo issues, which are classified as issues of $10 billion or more, have also set a new high with $156 billion being offered in the first eight months of the year. Whether all these corporations will be able to repay their debts however, is another question entirely.