A shopper leaves a Walmart store in Bradford
A shopper leaves a Walmart store in Bradford, Pennsylvania, U.S. July 20, 2020.

Companies with the highest credit ratings in the world are engaged in a now-or-never U.S. dollar bond issuance spree to get ahead of a continued spike in borrowing costs and as liquidity in the market is expected to dwindle in the next few months.

The first working day after a long holiday weekend saw 19 investment-grade rated companies raise $35.35 billion, the most to price in a single day this year, according to IFR/Refinitiv.

The 44 tranches of bonds sold by the 19 companies on Tuesday were also the most ever priced in a single day, beating a previous record of 39 tranches sold on September 3 2019, according to Informa Global Markets data. On Wednesday, seven more companies raised $11.25 billion.

"There is a strong motivation to issue debt now rather than later because there are concerns that investment liquidity will be materially reduced as we near the end of a year that has yielded poor returns for investors," said Jessica Lehmann, head of U.S. debt syndicate at HSBC.

Liquidity in bond markets has been patchy in recent months as investors cut back on debt investments that were sensitive to rising interest rates as a result of a hawkish stance by the Federal Reserve to combat runaway inflation.

Year-to-date returns on investment-grade bond investments are down 15.2%, according to the ICE BofA US Corporate Index, alongside a rise in U.S. Treasury yields as interest rates have risen and economic growth slowed.

High-quality companies, however, are still easily able to raise money, investors said.

Retailers like Walmart, Dollar General and Target were among the new bond issuers and they were accompanied by McDonald's, Nestle, Mondelez International among others.

"These companies are still producing strong free cash flow, so from a fundamental perspective, investors aren't concerned about them," said Natalie Trevithick, director and head of investment grade credit at Payden & Rygel, a privately-owned investment management firm.

On average, the 19 new bonds with maturities from three years to 40 years received orders that were 2.74 times the final issue size, according to Informa Global Markets data. Though fairly robust, this oversubscription rate is lower than in August, when $114.7 billion of bonds were issued and received orders 3.29 times the final issue size.

"There is no reason to wait anymore," said the head of US debt syndicate at a European bank who preferred to be unnamed. "It's the devil you know versus the devil you don't," he added.

A BMO Capital Markets credit research note expected more debt issuance, particularly from borrowers that had not issued as much debt this year. It added, those rated in the BBB-band this year made up only 40% of gross Investment-grade bond issuance, down from a 2016-2021 average of 47%.

Companies are trying to get ahead of what they expect to be a tough road ahead in terms of borrowing costs. Already, the year-to-date 2022 new issue coupon levels for investment-grade companies have risen to 4%, the highest level since 2018, according to a CreditSights research note.

The firm expects another $160 billion to $265 billion of new issue supply in the next four months of 2022 to push the year's total to around $1.1 trillion to $1.2 trillion, which is lower than the $1.46 trillion recorded in 2021.

Federal Reserve Chairman Jerome Powell arrives to testify before the Senate Banking Committee, in Washington, D.C.
Federal Reserve Chairman Jerome Powell arrives to testify before the Senate Banking Committee hearing titled The Semiannual Monetary Policy Report to the Congress in Dirksen Building in Washington, D.C., March 3, 2022. Tom Williams/Pool Via REUTERS