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
"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
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
"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."
RATES A RISK
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.