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Sept. 25, 2019, 2:34 p.m. EDT

Noble Energy joins a crush of U.S. companies using ultra-low rates to redeem old debts

Redemptions are coming fast and furious

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By Joy Wiltermuth


Bloomberg News/Landov
Oil production rises in U.S. Permian Basin. Bloomberg

Even debt-prone U.S. energy companies have been focused on the benefits of redemption.

Noble Energy /zigman2/quotes/210375673/composite NBL -1.96%  joined the surge of U.S. companies in September locking down ultra-low borrowing rates for decades to come, but without adding to the $9 trillion-plus pile of corporate debt.

The Houston-headquartered oil and gas company raised $1 billion on Tuesday by selling BBB-rated debt, which was evenly split between 10-year paper that priced to yield 3.25% and 30-year bonds at 4.2%.

Rather than buyback stock or fund an acquisition - popular trends in corporate finance in recent years - Noble said that all proceeds from its fresh capital raise would be earmarked to redeem its 4.15% coupon bonds that mature in 2021, through a tender offer that will end September 30.

Duke Energy /zigman2/quotes/201480230/composite DUK +0.0099%   on Wednesday also plans to borrow $400 million for 30 years in the bond market, while marking its proceeds to repay a series of tax-exempt bonds, a short-term intercompany loan and for general corporate purposes.

“Literally, we get notices of corporate tenders everyday now,” said Karissa McDonough, chief fixed income strategist at People’s United Advisors, in an interview with MarketWatch.

“I think a lot of the escalation in tender activity is coming from CFOs looking at the volatility and thinking: We don’t have to get it perfectly right, but there is a window. Let’s just go for it.”

Analysts at Bank of America Merrill Lynch dubbed the trend “redemption time” in a Tuesday note to clients, which spelled out why investment-grade U.S. companies have added only $43 billion to their outstanding debt in September, even while issuing more than $150 billion of new bond supply.

This chart shows each month of U.S. high-grade bond supply for 2019 and how much funded redemptions.


Bank of America Merrill Lynch
U.S. companies seek redemptions

Analysts at Bank of America said they expect more of this type of “liability management” activity in “the coming months while interest rates are still relatively low.”

Easy credit over the past decade has fueled a boom in corporate debt, which in the second quarter reached a record $9.4 trillion, according to data from the Securities Industry and Financial Markets Association.

Red flags have been raised about mounting risks in the sector, including the potential for fallout from the record $3 trillion-plus BBB-rated bracket of investment-grade corporate debt, which sit on the cusp of being considered “junk-rated” credit.

Federal Reserve Governor Lael Brainard on Wednesday underscored the concerns the central bank has around corporate indebtedness in testimony before the House Financial Services Subcommittee on Consumer Protection and Financial Institutions.

Brainard warned that “excesses in corporate debt markets could amplify adverse shocks and contribute to job losses,” while pointing out that rising delinquencies and defaults can crimp the amount of credit that banks are willing, or able, to offer.

/zigman2/quotes/210375673/composite
US : U.S.: Nasdaq
$ 18.55
-0.37 -1.96%
Volume: 6.52M
Feb. 20, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
2.59%
Market Cap
$8.88 billion
Rev. per Employee
$1.91M
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/zigman2/quotes/201480230/composite
US : U.S.: NYSE
$ 101.43
+0.01 +0.0099%
Volume: 2.71M
Feb. 20, 2020 6:30p
P/E Ratio
19.93
Dividend Yield
3.73%
Market Cap
$74.35 billion
Rev. per Employee
$815,112
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