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By Hillary Flynn
NEW YORK, Sept 9 (IFR) - Home Depot's successful 40-year bond this week has piqued the interest of a number of high-grade issuers that have so far this year focused on issuing bonds with maturities only up to 30 years, said bankers.
While the issuance of 30-year bonds has increased in recent months, 40-year issues have surprisingly been a rarity.
In the year so far, just three corporate high-grade borrowers, including Home Depot, have ventured that far up the curve, compared with 12 last year and eight in 2014.
Issuance has been focused on the shorter end of the market or bonds with maturities of 10 years and below, as borrowers remain unsure about appetite for longer tenors due to uncertainty about the direction of US interest rates.
Out of the US$964.067bn of high-grade bonds issued year to September 7, US$505.9bn have had tenors of 10 years and below, while US$458.111bn have carried longer maturities.
But investors are now increasingly willing to risk going longer. This mindset change is partly driven by a quest to increase returns, as longer-term bonds have performed much better than expected this year. Investors also simply get paid more by adding duration.
"If you are an investor and were worried about duration risk, you have missed out this year," said a banker. "If you have been on the sidelines, it has been a painful year."
The overwhelming response to Home Depot's 40-year bond this week underscored the growing strength of appetite for paper with this tenor.
The US$1bn tranche was the home improvement company's first-ever 40-year and came as part of a US$2bn bond sale.
It was a hit not only with traditional insurance companies but other accounts that would not typically buy this paper, helping swell the order book to US$5.8bn. That in turn allowed the company to tighten the spread by 25bp during bookbuilding.
The bonds were finally priced with a new issue concession of just 3bp compared to outstanding paper, which again reflected the strength of demand for the piece.
From a cost perspective, garnering 40-year money also made sense, given the flattening of the long-end swaps curve over the last few weeks, said bankers.
"If issuers think there is value, they will do longer," said a second banker. "And if the curve is flat, why not?"
Investors already comfortable buying 30-year paper also think that a 10-year extension is worth the risk, especially in this low-rate environment.
"We are not worried about the duration extension of going into the longer maturity because they are not that much longer in duration terms - or interest rate sensitivity - than 30-year ," said Mike Collins, a senior investment officer at Prudential.
For Home Depot, the outcome certainly looked attractive at a final spread of 135bp over Treasuries. While it is not a strict apples-to-apples comparison, that spread was tighter than the 155bp achieved this week by the similarly rated Shell on a shorter dated 30-year.
Home Depot also priced inside the Treasuries plus 150bp secondary level on a 3.95% 2056 sold in August by Microsoft - a rare Triple A borrower and one of the few corporates that has ventured this far up the curve. (Reporting by Hillary Flynn; Editing by Shankar Ramakrishnan, Paul Kilby)
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