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Corporations Rush to Credit Markets for Cash

Corporations are rushing to tap the debt market, drawn by low interest rates and a window of opportunity before year end.

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Monday was the third busiest day of the year for investment grade corporate issuance—at $15.5 billion, according to Thomson Reuters IFR. There was also another $4.3 billion in high-yield debt issuance.

IFR expects $25 billion of issuance this week, and possibly as much $30 billion, with much of the debt priced in the beginning of the week, ahead of Friday's Veteran's Day holiday. There was $17.7 billion of investment grade corporate debt issued last week, and $22.5 billion the week before.

"We had thought we'd have $20 billion for the week and we're almost there today," said Joel Levington, managing director of corporate credit at Brookfield Investment Management.

Abdullah Karatash, head of U.S. fixed income credit trading at Natixis, said some of the issuance has to do with the calendar and the fact that markets are relatively calm, despite the continued worry about Europe and record yields for Italian sovereign debt. The Italian 10-year yield touched a record high of 6.7 percent Monday, approaching 7 percent, while U.S. corporate junk bond yields are approaching 8 percent.

Karatash said there is also a large amount of investor money that has been sidelined and institutions are being pushed to put it to work before year end.

"A lot of these institutional investors have benchmarks they are judged against," he said. "So, if you have one big guy going into corporate bonds, you have everybody else rushing in. The demand is really begetting supply."

Levington said companies are also coming to market because the blackout around the earnings period is over for many of them. Also, "You have some signs of stabilization in the market. That combination leads corporations to jump on opportunities and issue debt," he said.

Karatash said issuance could be active until around the Thanksgiving holiday, when it will slow. It could pick up again in the early part of December before slowing in the final two weeks of the year. "I think investors recognize the European story isn't over. It's not going to be over anytime soon," he said. He said the activity is being spurred by the "relative" calm, which is the "new normal."

Companies coming to market Monday included United Healthcare , with $1.25 billion in 5-, 10- and 30-year bonds, and Dr. Pepper Snapple with $500 million in 7- and 10-years.

But one notable is Amgen , looking to sell $6 billion of debt to fund a stock buyback. While the stock market celebrated the news by sending its shares higher, Fitch downgraded its credit rating to BBB from A-. Levington said Amgen looks like it could price with a yield of as much as 200 basis points above the 10-year Treasury, which was yielding about 2 percent Monday. Amgen's outstanding 10-year was trading at 92 basis points over Treasurys last week.

Fitch said the action was the result of Amgen accelerating its new financial policy, announced in April, to return a significant portion of its profit to stockholders. Amgen is doing that through a dividend and share repurchases. Amgen's management has a target payout ratio of 60 percent. But Fitch said it anticipates the payout target will be far exceeded over the intermediate term from expected increases to the dividend and aggressive share repurchasing activity, including the tender offer for up to $5 billion in common shares.

"I would rather see enhancements to the quality of its assets. To me that's where the value is generated, not how you try to leverage them," he said. Levington said he listened to Amgen's management call on he tender and debt offer, and he notes there could be more companies doing similar maneuvers.

"I think its companies that focus on EPS (earnings per share) accretion and are in mature businesses that are potential targets for doing this. It's beefing up their EPS growth, which in their minds is a positive," he said.

United Health will not need to pay up as much because it is using its offering for general corporate purposes, including replacing some of its $2.4 billion in short term debt, Levington said.

If the corporate issuance this week surpasses $30 billion, it would be for the fourth time this year. The last was in May, when the week of May 20, issuance reached $35.97 billion. There have been 11 weeks of $30 billion plus issuance since April, 2008.

Follow Patti Domm on Twitter: @pattidomm

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