American companies can’t get enough of the bond market.
Those companies have been selling piles of new bonds for several years now — more than $1 trillion worth annually since 2009, according to data compiled by Bloomberg News.
And this year is going to be busier still. American companies are on track to sell about $1.5 trillion in new bonds to eager investors. A bit of perspective: That’s roughly three times what companies issued a dozen years ago.
Surging demand for those bonds — from mutual fund investors and institutions — has driven interest rates to historic lows. Companies would be crazy to pass up the opportunity to borrow at such low rates.
“The big dynamic underlying all this is that debt is cheap,” says Erik Weisman of MFS Investment Management in Boston. “It has become cheaper and cheaper month after month for the last three years, and companies are taking advantage of that.”
But despite what the borrowings suggest, companies aren’t really piling on the debt. Weisman says about half of new corporate bonds sold this year were used to refinance more expensive old debt, just as a homeowner might do to lower monthly mortgage payments.
As any homeowner knows, a dollar saved thanks to lower borrowing costs is just as valuable as a dollar earned. In the corporate world, that means bond refinancing can give a powerful boost to the bottom line for years to come.
One important difference between corporate borrowers and homeowners: Companies across the entire credit spectrum — from investment grade risks to junk bond issuers — enjoy easy access to borrowed money. Good luck refinancing your mortgage with dicey credit.
“If you’re a chief financial officer of a corporation, you have unfettered access to the markets,” says Diane Vazza, head of global fixed income research at Standard & Poor’s. “What you’re seeing is a huge, voracious appetite for the debt that these companies are issuing.”
Highly rated companies now sell bonds that yield about 3.6 percent to investors. In more typical bond markets, those businesses would have paid about 6 percent to borrow the same money.
For companies with junk-debt ratings, new bond issues might pay investors about 6.8 percent today. Those borrowers enjoy both lower rates and easy access to credit. They might pay 8 percent in more typical times — if they could convince investors to buy their bonds at all.
The corporate bond boom won’t last forever. Rates will go up eventually. Companies don’t have an unlimited amount of debt that needs refinancing.
“I’m not going to call the bottom with rates,” says Vazza. “But clearly what we’re seeing is opportunistic. That window continues to be open.”
And so far companies are still lining up to squeeze through.
Dorchester bank in tiny IPO
And now for something completely different: Meetinghouse Bancorp Inc. of Dorchester.
Meetinghouse had no interest in contributing to the corporate bond boom. The one-branch banking company went public last week in what was surely one of the nation’s smallest IPOs of the year.
Meetinghouse, which boasts total assets of $74 million, raised $6.6 million when it completed its stock offering. In fact, the stock was never offered to the public in the conventional sense. Depositors, bank insiders, and an employee stock plan purchased all the shares.
Combing through US stock offering data for the year, I could find only two smaller IPOs that actually made it to the public market with an underwriter. As a public stock, Meetinghouse is smaller than small. It’s a stretch to even call the 98-year-old bank a microcap.
I phoned Anthony Paciulli, the chief executive of Meetinghouse, and asked him a basic question: What exactly was the point of that?
Paciulli had a simple answer. He said the bank had grown in recent years, avoiding lending pitfalls that hurt some other banks, and could not get much bigger without adding capital.
I politely suggested that bankers have a habit of going public and then selling the business when they near retirement age in a few years. Paciulli, 63, was having none of it.
“We want to survive,” he told me. “The idea here is to grow.”
Now he has shareholders rooting for him, too.