Question

Apple on Wednesday joined U.S. companies ranging from Deere & Co. to Walt Disney in a recent sprint to issue new bonds, taking advantage of the steep decline in benchmark interest rates and a surge in investor demand. Apple launched its first bond deal since 2017 and is looking to raise $4 billion to $5 billion with bonds ranging in maturity from three to 30 years, according to people familiar with the sale. Twenty-one corporations with investment-grade credit ratings issued bonds totaling about $27 billion on Tuesday, said Andrew Karp, head of investment-grade capital markets at Bank of America. “That’s equivalent to a busy week for us — in one day,” he said. The bond boom is the corporate version of the refinancing rush that hit the mortgage market last month as homeowners moved to lock in cheaper loans. Sharply declining U.S. government bond yields — the 10-year Treasury yields about 1.5% compared with around 2% in July — have dragged down corporate borrowing costs in lockstep. The yield of Disney’s bond due in 2046 fell to 2.83% from 3.3% since the start of August, according to data from MarketAxess. Deere and Disney nabbed record-low yields on bonds they issued Tuesday and the surge continued Wednesday with Apple leading the charge. Coca-Cola and health insurer Anthem also announced new bond sales Wednesday, according to S&P Global Market Intelligence. Companies are also capitalizing on a surge in demand for investment-grade corporate debt in recent months that is helping to drive yields lower, said Gibson Smith, founder of Denver-based Smith Capital Investors.“The flows are presenting issuers with an opportunity to borrow at new lows,” he said. Mutual funds focusing on corporate investment-grade bonds took in $32 billion over the past three months compared with $77 billion of outflows from all stock funds over the same period, according to data from Thomson Reuters Lipper. The asset class is still attracting inflows because it occupies a sweet spot in the fixed-income landscape. Bonds issued by name-brand corporations give investors a relatively safe alternative that still pays more than government bonds when they switch out of stocks and high-yield debt because of global uncertainty. Conversely, government-bond investors fleeing the negative yields spreading through Asia and Europe can buy corporate bonds without taking on too much more risk.U.S. government bond yields were virtually unchanged Wednesday after initially rising on optimism about easing tensions in Hong Kong. The yield on the benchmark 10-year Treasury note recently traded at 1.466%, compared with around 1.469% Tuesday, according to data from Tradeweb. Yields fall as bond prices rise. Questions:

1. Based on the article, what was driving this flurry of corporate issuance? ·

2. What made the September 2019 transactions particularly notable? ·

3. Considering that interest rates today have dropped significantly from the September 2019 timeframe, what would you do as a corporate finance professional with your firm’s capital? From an issuers standpoint? From a corporate investment standpoint? ·

4. Although interest rates have dropped in recent weeks, what impact has the economic slowdown had on corporate debt credit ratings?

Answer 1

1.Answer

Following are the driving forces for flurry of corporate issuance of bonds:-

1. The steep decline in the intrest rate benchmarks will decrease the cost of capital to company
2. With decreased interest rates and increased demand for the corporate bonds will make the issuance and sale of bonds without any leftouts
3. Other reasons such as decline in government bond yields, negative yields in government bonds and considering the investing bonds as fixed income landscape increased the demand for bonds, which inturn positively impacts the issue of bonds.

2. Answer

Decline in the yields of both govt bonds and corparte bonds; record level low yields of corporate bonds and issuance of new bonds by corporates made the transactions in Sep 2019 notable. Follwing are details of above conclusion for reference.

1. US govt bond _ 10 year treasury yields only 1.5% when compared to 2% in July, which impacted the corporate bond cost.
2. The yield of Disney’s bond due in 2046 fell to 2.83% from 3.3% since the start of August, according to data from MarketAxess
3. Deere and Disney nabbed record-low yields on bonds they issued Tuesday and the surge continued Wednesday with Apple leading the charge.
4. Coca-Cola and health insurer Anthem also announced new bond sales Wednesday, according to S&P Global Market Intelligence.

3.Answer

From an Issuer Stand point:-

Considering the decline in the interest rates and increase in the demand for bonds, firm needs to issue bonds at the present point of time. The benifts from the issuance will be low cost of capital, non liquidation of owners equity

From an Corporate investment stand point:-

Based on investment grade credit rating a firm can invest in a corporate bond(However before investing it needs to consider its capacity of taking risk and can invest also in equity markets). Benefits:- since bind has a investment credit rating risk is low, fixed income module, higher rate of return compared to govt bonds.

4.Answer

Following are the few main reasons for impacts of economic slow down on corporate ratings;

• A sharp drop in private consumption, continuing low investments and increasing working capital intensity will lead to the deterioration in corporate credit profiles.
• In the recent times, Increasing working capital intensity and drop in profitability emerged as the leading reasons for the rating downgrades in more than half of the cases