Concerns were raised from investors recently due to a slowed global economy and a continuous European debt crisis. One implication of this is that investors have been seeking safer investments, specifically long-term bonds from investment-grade companies.
The Wall Street Journal reports that investment-grade companies, such as United Parcel Service, General Electric Co. and Comcast Corp. have already sold $91.9 billion of 30-year bonds in 166 offerings this year.
This figure is in contrast to the $73.2 billion worth of bonds sold in 145 offerings during all of last year. The 26 percent increase to date is, in part, due to the rising demand from investors for investments in stable investment-grade companies.
Bonds are debt investments in which investors loan money to an entity that borrows the funds for a defined period of time at a fixed interest rate, as defined by investopedia.com. These investments are generally a safe investment because in the instance of the issuer’s bankruptcy bondholders will be paid before anyone else in the liquidation process.
Investors have reached out for long-term bonds because they “have an appetite for yield” but want to put their cash into something relatively stable in a time of economic uncertainty.
Along with the demand for long-term bonds from investors, issuers have been drawn to the “longer maturities” at the present time for a few significant reasons, The WSJ reports. The first reason is the presence of historically low interest rates.
The WSJ reports that lower interest rates have been the result of the Federal Reserve’s easy monetary policy, along with the global economy’s continuing weakness. Another reason for companies to issue bonds is that the near-term economic outlook has been raising concern.
The global economy’s continuous decline in growth has given corporations a sense that “now is as good a time as ever to raise debt,” reported The WSJ. This is because the relatively low interest-rates on the 30-year bonds give investment-grade companies the opportunity to do debt financing at a much lower cost.
The WSJ reported that on $1 billion of debt issued from bonds, the annual interest payment savings with current interest rates is “roughly $20 million,” compared with rates from the past several years.
Mark Gray, an analyst with Moody’s Investor’s Service, said, “No treasurer or CFO wants to be the one treasurer or CFO who didn’t get cheap long-term money when it was available.” An example of an investment-grade company who has been taking advantage of low interest debt financing through the issuance of bonds is General Electric Co. They sold $7 billion in bonds, including $2 billion in 30-year bonds, on Oct. 1.
The WSJ reported that GE plans to use part of the money raised to refinance $5 billion of debt that will be due in February of 2013. The ability of investment-grade companies like GE to supply investors’ demands for safer investments will continue with the current economic situation. Debt financing over the long-term takes maturity risk out of the question for a long time.
With implications that interest rates will not be rising any time soon, companies with good credit ratings have very good access to investors in the market for long-term bonds.