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. Last Updated: 07/27/2016

Low Interest Leads to Flood of U.S. Bonds

NEW YORK -- In the weeks since the attack on the World Trade Center, blue-chip corporations have issued a torrent of debt.

Ford, General Electric, IBM, Kraft, AT&T, General Motors and other companies have doubled and even trebled their initial plans for bond offerings as investors, disenchanted with the stock market, have all but begged to buy their debt. In all, companies have issued 31.5 percent more debt in the last 11 weeks than they did in the period a year earlier.

The companies are taking advantage of the chance to raise cash at bargain-basement prices, thanks to low interest rates, and to retire more expensive debt.

But they may also have little-discussed concerns that money will be scarce in the future, particularly if the economic downturn persists and the recovery is less vigorous than economists now hope. Bank lending is at a 30-year low, according to the Conference Board, the nonprofit research organization that produces the consumer confidence index and the index of leading economic indicators. And buyers are hard to find for commercial paper, the short-term, cheap debt that corporate purebreds rely on. Standard & Poor's says the amount of commercial paper issued by nonfinancial companies has shrunk by roughly 30 percent this year.

William Cunningham, director of credit strategy at J.P. Morgan, said that companies "have an opportunity to build a war chest to help them get through the hard times, and they're taking advantage of it."

Before the terrorist attacks, analysts were expecting debt issuance to slow late this year after a tremendous first half.

So much for expectations. Ford originally planned to raise $3 billion. It was able to raise $9.4 billion and is said to be thinking about trying to raise $7 billion more. Kraft Foods had planned to issue $2 billion of bonds. Instead, it offered $4 billion. AT&T raised $10.1 billion, twice as much as it originally planned. The AT&T and Ford issues rank as the second- and third-largest ever.

All told, 573 corporations have issued $181 billion of debt since Sept. 11, compared with 692 companies that raised $138 billion in the same period last year.

"When you look at other asset classes, the corporate bond market offers some of the better values," said Robert LoBue, head of the investment-grade fixed income syndicate at J.P. Morgan, which has underwritten roughly half the issues that have come to market since Sept. 11. "There's still a lack of confidence in stock valuations based on the weakness we're seeing in earnings."

Issuers and their underwriters most often cite the low interest rates on Treasury bills as the reason for the surge in corporate debt. Corporate bonds are often priced in relation to U.S. government debt, and thanks to a cascade of interest-rate cuts by the Federal Reserve this year, well-heeled companies can borrow at extremely attractive rates.

IBM, for instance, recently sold $1.5 billion of five-year notes with the lowest coupon it has ever issued at 4.875 percent.

Others, though, read the stampede of premier companies to issue debt as a sign that credit is getting tight. Investment-grade companies typically juggle a smorgasbord of short-, intermediate- and long-term debt, but they are definitely skewing the mix toward the long end these days. No doubt, that's because it's cheap -- but it also suggests they may foresee a time when money is more scarce, the war chest Cunningham referred to.

It was not so long ago, after all, that companies experienced a credit shortage. "A credit crunch was brewing last year until the Fed stepped in and started aggressively lowering interest rates, which averted it," Cunningham said.

But a cash problem persists in some ways despite the Federal Reserve's series of interest-rate cuts. "We are in a cash crisis like none we have experienced in recent memory," James Padilla, a Ford executive, wrote in a recent memo to his staff.

Many companies with less-than-pristine credit ratings have trouble raising money and may be having more because of the stampede by blue-chip companies. "When companies like Ford or General Electric come into the market, they squeeze a lot of other, somewhat riskier credits out," said Gail Fosler, chief economist at the Conference Board.

Jack Ablin, chief investment officer at the Harris Trust and Savings Bank, said that the economic recovery depends on companies obtaining credit.

"My primary concern is the lack of available credit across the spectrum," he said. "We are forecasting an economic recovery in the middle of next year, but the one thing that could go wrong with that forecast is if the availability of credit stays where it is or gets worse."

Another concern is that debt is piling up with negative consequences. "The Fed is trying to prevent the bubble from bursting by keeping the forces of credit exuberance alive," Barton Biggs, chief global strategist at Morgan Stanley, wrote to investors earlier this month. "The trouble is, although it may work in the short run, in the long run the debt burden will be bigger and the adjustment process more painful."

To be sure, some of the new debt is being used to retire commercial paper. But companies are taking on more than they needed to accomplish that goal.

The longer-term money they are borrowing is more expensive than the commercial paper, even if it is cheaper than it has been in a long time. The spread, or the difference in interest rates on Treasuries and corporate bonds, has generally widened since Sept. 11, although not across the board.

"There is a cost factor involved, but we try to minimize that," said David Moore, manager of fixed-income investor relations at Ford Credit, which accounted for the bulk of the $9.4 billion that Ford borrowed last month. "We're mindful of our liquidity and want to make sure we ensure it."

Like many of the companies issuing debt, Ford is curbing its dependence on the commercial paper market. For the year through Oct. 16, Ford had cut the amount of paper it had outstanding by almost 60 percent to $17 billion. "That puts us in a very good position given our rating," said Moore, who was one of the few executives willing to discuss his company's strategy.

Ford, like a host of other companies, has had its credit ratings cut. Many buyers of commercial paper, like money market funds, lend to only the highest-rated companies. So far this year, Standard & Poor's has knocked 57 companies out of the top ratings for commercial paper, compared with 49 last year.

Total outstanding commercial paper has fallen 30 percent this year, according to Diane Vazza, head of global financial investment research at Standard & Poor's, thanks to those downgrades and to great caution among investors. "We've seen some issuers driven out of the market," Vazza said.