Just about every aspect of the US credit bubble is setting new records these days. Now corporate bond sales did it: they punched through the $1.5-trillion mark, beating the full-year record of $1.49 trillion in 2013. It’s a feeding frenzy – corporations and Wall Street feeding on cheap investor money before rates go up.
On Tuesday, Amazon went back to the till to take $6 billion in new money from investors via another bond sale, after having sold $3 billion two years ago. Debt is piling up. Excluding what it owes its suppliers, Amazon ended 2011 with $2.6 billion in debt; by last quarter, the pile had grown to $8.4 billion. This quarter, an additional $6 billion will be piled on top. Profit-challenged Amazon needs the money: last quarter, it booked the largest operating loss in its history.
On Monday, it was Medtronic that went to the till for $17 billion in new money, the largest bond sale this year. It needs the money not to expand its research facilities or operations or anything else productive, but to buy surgical gear maker Covidien. The deal beat the other mega deals this year, such as Alibaba’s $8 billion bond offering two weeks ago or GE’s $13.2 billion offering and Verizon’s $14.8 billion offering earlier this year.
Like many of its corporate brethren, Verizon is already drowning in debt, after a borrowing binge that included the record-breaking $49 billion bond offering last year to help pay for its acquisition of Vodafone’s share of Verizon Wireless.
Amazon’s deal pushed investment-grade bond sales so far this year to $1.174 trillion. Junk bonds have been red-hot too. The current sales of $344 billion are just a notch from the 2013 record of $348 billion, according to Bloomberg. That record is likely to fall shortly. In total so far this year, corporations have collected $1.518 trillion in new money from investors via bond sales alone, the most ever.
Companies are taking advantage of enticingly low borrowing costs while they still can. And they don’t waste their energy investing the proceeds in productive activities, such as capital expenditures or expansion plans. Instead, they’re using the money to buy back their own shares, pay dividends, and acquire other companies.
Timing couldn’t be better. In this super-expensive market, they’re overpaying for their own shares; and they’re overpaying for other companies by adding huge premiums to already inflated stock prices. Wall Street, which gets fat from the fees, provides the requisite hoopla.
It’s a perfect use of debt. Instead of creating something that will generate an income stream with which to service and pay off the debt, corporations are blowing the proceeds. This works wonderfully as long as ever cheaper new debt is available to service and pay off old debt.
For investors, it has been a great deal too, thanks to the Fed’s interest rate repression and QE, and its jawboning that markets so love because it signals to everyone in which direction to run all at the same time, screaming, “Don’t fight the Fed.” The simultaneous buying inflates prices and represses yields. Bond investors have been rewarded at every twist and turn of the yield repression saga not with adequate yields, but with higher prices for their bonds.