NEW YORK, Jan 16 (IFR) - Corporate treasurers at companies like Google are being forced by the Federal Reserve’s low-rate policy to invest in ever-riskier credit products, including longer-dated investment-grade bonds, junk bonds and leveraged loans, according to buyside and sell-side sources.
In an effort to get a return on their mountains of cash at hand, Google And others have purchased high-yield bonds and leveraged loans, while names like Microsoft and Apple are said to have dabbled in non-investment-grade securities.
“Many of the companies with the largest levels of cash on hand have bought high-yield bonds and one of the big areas of interest this year is leveraged loans,” said a fund manager at one of the biggest US investment firms.
“Some are also looking at emerging market local debt as a category,” he said, although far fewer than those going down the credit spectrum and into non-investment-grade loans and bonds.
Google’s treasurer, Brent Callinicos, could not comment because the company is in earnings blackout.
Microsoft and Apple officials were not immediately available for comment.
It’s understood, however, that Google, like other experienced corporate investors in the debt capital markets, has purchased non-investment-grade debt via external fund managers with specific expertise in the riskier asset class.
The most often mooted are in the pharmaceutical and technology sectors, where companies throw off billions of excess cash a year, said sources.
Going into higher risk corporate bonds and loans is a new phenomenon for corporate treasurers, who have traditionally invested in the highest quality corporate bonds and in maturities typically no longer than three years.
But those bonds are now so tight in spread that many of the biggest institutional investors are underweighting single A and above rated corporates in their portfolios. At the same time, they are increasing their investments in lower rated, longer-dated and also more junior bonds in the capital structure to get yield.
The companies with hoards of cash on hand are facing the same investment dilemmas, and their cash keeps piling up every day as they stay away from major acquisitions.
“The anomaly here is that you have had Fed intervention that has created an artificially low Treasury curve and because corporate yields are at all-time tights and both investment-grade and high-yield bond spreads have had such a fantastic run in the last year, there are only so many places to go to get yield,” said one portfolio manager.
Those areas in the high-grade market for the corporate investors are the triple-B rated credits and the longer dated maturities.
“Leading into this year corporate treasurers in general, and those in the pharmaceutical and technology sectors in particular, have become more active and more broad in what they are willing to buy,” said one debt capital markets source at a leading investment-grade bond house on Wall Street.
“Some have gone down the credit curve into triple Bs and out to maturities of five-, seven- and even 10-years, whereas we used to only see them in front-end floaters.”
Some of the most experienced corporate investors in the bond markets will directly participate in new bond deals in the investment-grade market and sometimes generate reverse inquiry, a common occurrence where an institutional account will ask a corporate to issue bonds.
It’s only those corporates with huge cash piles, however, that appear to be investing in high-yield bonds and loans, via external fund managers.
“Some companies have so much cash that does not have any immediate use that they have the ability to think of some of that cash in more of a total return context,” said the fund manager at the large investment firm.
High-yield bonds, while at record low yields, could still offer some return, say analysts, because their spreads are still much wider than their historical tights.
Yet on a relative value basis, leveraged loans are looking more attractive than high-yield bonds, according to a number of fund managers. That’s because they are ranked higher in the capital structure than high-yield bonds, are not affected by rising Treasury rates as much as fixed income securities, but in many cases are currently offering the same yield.
In the high-yield bond space some of the savvier corporate investors are now taking some bond risk off the table and looking at leveraged loans instead.
Even so, credit default risk by definition is always greater in a BB leveraged loan or bond than a single A name.