Pre-market actions: companies source cheap cash as long as they can

What’s happening: At the start of the year, companies rushed to issue debt. Their aim is to tap the market before the Federal Reserve starts raising interest rates, which have been close to zero since the start of the pandemic.

In the U.S. market, companies have raised nearly $ 96 billion as of Wednesday, according to data from Refinitiv. It was the strongest start to the year on records dating back to 2003.

“The funding that we saw in the first [weeks] of the year has been a significant one, and this reflects not only issuers trying to get ahead of their competition, but also that rates could be 1 [percentage point] higher or higher by the end of the year, ”Barnaby Martin, Bank of America credit strategist, told me. “It’s a very different dynamic from that of the last few years.

The Federal Reserve has indicated it could hike interest rates three times in 2022, although many on Wall Street now expect four or more hikes to curb price increases (more details below). Some policymakers have indicated that they are not opposed to it.

“I currently have three increases for this year, and I would be very open to starting in March,” Patrick Harker, chairman of the Philadelphia Federal Reserve, told the Financial Times in an interview published Thursday. “I would be open to more if necessary.”

Notable issuers in January include automakers like General Motors (DG) and Ford (F), caterpillar (CAT), Deere (OF), the insurer MetLife and Dick’s Sporting Goods (DKS), by Refinitiv.

The rush has been evident in the United States and Europe, Martin said. It is based on the realization that even if borrowing costs remain low by historical standards, access to capital will only become more expensive.

“If the rates are really going up from here, then we’ve seen the best in corporate finance,” Martin said.

Blue-chip companies with good credit scores are leading the charge, Martin said. But some issuers with lower ratings have also been successful in joining the action, although such trades usually take longer to complete. Cruise company Royal Caribbean (RCL) closed a $ 1 billion bid last week.
AMC Entertainment (AMC) CEO Adam Aron recently took the unusual step of expressing his interest in debt markets on Twitter. He said his “New Year’s resolution for AMC” was to refinance some of the struggling movie theater chain’s debt in order to lower interest charges and strengthen its balance sheet.

Looking ahead: Corporate borrowing is expected to decline later this year after a quick start. Paul Watters, head of credit research for S&P Global Ratings in Europe, told me that non-financial corporate issuance is expected to drop around 7% globally in 2022.

One factor is that refinancing will be less attractive once rates start to rise, Watters said. Companies also already have plenty of cash on hand thanks to the favorable borrowing environment over the past two years. Additionally, China is trying to reduce corporate reliance on debt financing in order to limit risks to its economy.

Taken together, this could lead to a lower 12 month period. But for now, the rush is on. Firms will certainly be encouraged by their bankers to “consider upstream issuance activity” for a rate hike, Watters said.

Inflation is rising at the fastest rate in almost four decades

Consumer prices in the United States rose at the fastest pace in 39 years in December, raising expectations that the Fed may need to react more aggressively to contain inflation.

The latest: The U.S. consumer price index has risen 7% in the past year, its biggest increase since June 1982, the Bureau of Labor Statistics reported on Wednesday.

Excluding food and energy prices, which tend to be more volatile, inflation has jumped 5.5% in the last year, the biggest increase since 1991. That’s a big increase compared to at the previous month’s reading of 4.9%.

The data is fueling forecasts on Wall Street that the Fed could raise interest rates more than three times in 2022. This pushes up US government bond yields.

Mark Haefele, chief investment officer at UBS Global Wealth Management, told clients the bank expects the benchmark 10-year US Treasury yield to climb to 2% “in the coming months, as investors are digesting the Fed’s more hawkish stance as well as the inflation numbers. “

The yield on 10-year bonds rose to nearly 1.75% early Thursday, compared to nearly 1.5% at the start of the year.

But Haefele doesn’t think the rising yields, which have historically encouraged investors to withdraw money from the stock market, “will jeopardize the rally in stocks,” noting that “year-over-year inflation” another is expected to peak again in the first quarter and decline over the course of the year. “

Here is the first major IPO of the year

Private equity firm TPG is set to debut on Wall Street, the first major IPO of the year.

Details, Details: The company valued its shares at $ 29.50 each, raising $ 1 billion. They are expected to start trading Thursday on the Nasdaq under the symbol “TPG”.

Investor demand for TPG shares could send a signal to other companies debating whether to proceed with public offerings at a delicate time.

HR software company Justworks delayed its IPO on Wednesday. He attributed the decision to market conditions.

The global IPO market had a record year 2021. But companies fear going public as investors reassess their commitment to risky bets amid expectations that interest rates will soon be on the rise.

In a report released late last year, EY said that while strong IPO momentum is still expected in 2022, companies should “remain flexible with a Plan B in place to meet the needs of financing in case the schedule for the IPO is delayed “.

“It will be imperative for companies related to the IPO to adopt a resilient and flexible strategy capable of adapting to changing market conditions,” said Paul Go, global IPO leader at EY.

Following

Delta Airlines (DAL) publishes its results before the US markets open.

Also today: The first US jobless claims for last week and a US producer price report for December arrive at 8:30 a.m. ET.

Coming tomorrow: earnings of Black rock (NOIR), Citigroup (VS), JPMorgan Chase (JPM) and Wells fargo (WFC).

Garland K. Long