Then last month it sold more than $30 billion of bonds in multiple currencies, swelling its total debt to a record high in the process, to help finance purchases of 5G spectrum. The company views the rise in leverage as a temporary move to fund a strategic asset that positions the company for growth, according to an emailed statement from Treasurer Scott Krohn in response to an inquiry from Bloomberg.
“For many industries, this liquidity was supposed to be temporary,” said Terence Wheat, senior portfolio manager of investment-grade corporate bonds at PGIM Fixed Income, who declined to comment on any specific corporation. “Now some companies may use it for acquisitions rather than paying down debt.”
Lower Penalties
Corporations are borrowing more now for the same reason they’ve been boosting debt levels for years: because they can. The average yield on an investment-grade corporate bond was just 2.2% as of Monday, far below the mean of the last decade of around 3.17%, according to Bloomberg Barclays index data.
And companies are finding that adding on more debt doesn’t necessarily hurt them much. The penalty for a ratings downgrade is generally minimal. A corporation in the BBB tier, or between one and three steps above junk, pays about 0.47 percentage points more yield than companies in the A tier, or four to six steps above speculative grade, according to Bloomberg Barclays index data. That’s close to the lowest difference in a decade.
That may be why more than half of investment-grade corporate bonds by market value are in the BBB tier, versus just 27% in the early 1990s. Typically, most investment-grade companies can choose to pay down debt and merit higher ratings if they wish.
“Companies have chosen to lever up,” said Richard Hunter, global head of corporate ratings at Fitch Ratings. “The wild card is going to be companies’ choices now.”
Acquisition Time?
For some North American companies, buying competitors looks like a good use of cash, as it can allow them to boost future earnings. Canada’s Rogers Communications Inc. said last month that it plans to acquire Shaw Communications Inc. for $16 billion. Its debt levels are expected to rise to more than five times a measure of earnings, a leverage ratio commonly associated with junk credit ratings. But the company said it plans to delever to a ratio of 3.5 times over the next three years.
Rising profits for companies have helped make their debt levels look less worrisome by at least one measure. The ratio of corporations’ earnings to their interest costs has been climbing for the last few quarters, signaling they have more income available to pay their debt. For investment-grade firms in aggregate, that ratio is now better than it was pre-Covid-19, while the metric for junk-rated companies has almost returned to levels before the pandemic, according to Bloomberg Intelligence.
High cash levels at companies make indebtedness look lower now by some measures. Net leverage, which subtracts cash from debt and compares that net debt level to a measure of earnings, is near pre-Covid-19 levels for both blue chip companies and riskier speculative grade corporations on average. Total leverage, which doesn’t subtract out cash, remains significantly higher that it was pre-pandemic, according to a Bloomberg Intelligence analysis of the investment-grade and high-yield corporate bond Bloomberg Barclays indexes.
If companies keep spending their money instead of paying down debt, net leverage will rise, said Noel Hebert, director of credit research at Bloomberg Intelligence.
“Ratings agencies have become comfortable with higher and higher leverage, thus companies are more and more happy to take advantage of it,” Hebert said. “There’s an incentive to hold leverage at elevated levels because there’s no real mechanism that’s punishing you.”
—With assistance from Sam Geier, Tom Contiliano, Drew Reading and Lisa Lee.
This article was provided by Bloomberg News.