March 24, 2020 / 12:45 PM / 14 days ago

Companies rush to debt market as Fed eases funding logjam

LONDON (Reuters) - A string of investment-grade companies rushed into an improved debt market to raise much-needed cash on Tuesday, as the U.S. Federal Reserve’s unprecedented stimulus package helped ease a funding logjam that had locked up global markets.

FILE PHOTO: The Federal Reserve Bank of New York building is seen in the Manhattan borough of New York, U.S., December 16, 2017. REUTERS/Eduardo Munoz

The economic devastation caused by the coronavirus pandemic had crippled global markets and frozen funding worldwide. But the Fed’s announcement eased some of the stress, and now Sanofi, Nestle, Diageo, Bank of America, Coca Cola European Partners and France’s BPCE have all issued bonds.

There were other indications that tension were easing. Prices on credit default swaps (CDS) — used to insure against company defaults — also fell, suggesting that worries about corporate insolvency was easing.

The first indications of improved sentiment came from Nestle and Sanofi, who generated over 24 billion euros of demand between them when they came to the market to issue long-term debt.

French biopharmaceutical firm Sanofi raised 1.5 billion euros from a sale of five-year and 10-year bonds. Nestle doubled the amount raised from a six-year and 10-year issue to 2 billion euros on demand of nearly 13 billion euros.

“The Fed bazooka is a big game-changer, it helps very strong issuers come back to the market and reopen it,” said Jerome Legras, head of research at Axiom Alternative Investments.

“We all know there’s huge amounts of cash in the market, all of them are happy to put it to work on names like Nestle, especially when they are coming at levels investors never dreamed of a month ago.”

In other signs funding was getting easier, a key measure of the premium investors pay for access to U.S. dollars remained close to its lowest since March 3.

That measure, the euro-dollar swap spread, fell to about 8 basis points, having risen as high as 86 basis points last week.

Traders suggested that other money market indicators, such as commercial paper — used by companies to get short-term cash — have also shown signs of improvement, and are now trading more in line with Treasury bills.

The spread between those two instruments, a key indicator of short-term funding stress, had blown out in recent times.,

JUNK TEST

A banker involved in some of Tuesday’s corporate bond issues said access to the market had always been there for high-rated companies — the real test will come when junk issuers try to come to market.

That said, trading in Europe’s main junk bond CDS index — considered a key indicator of sentiment towards the high-yield market — fell to 600 basis points, according to Tradeweb data; declining more than 100 bps from Monday’s highs on Monday.

Reporting by Abhinav Ramnarayan; editing by Catherine Evans, Larry King

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