BMY Bristol Myers Squibb Co

By Sam Goldfarb 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 9, 2019).

International Business Machines Corp. sold $20 billion of bonds Wednesday to help fund its purchase of Red Hat Inc., adding to a busy week for corporate-debt issuance a day after Bristol-Myers Squibb Co. sold $19 billion of bonds to finance its acquisition of Celgene Corp.

IBM's sale is the largest of the year -- overtaking the Bristol-Myers deal -- and tied for the seventh-largest on record, according to Dealogic.

Despite signs that the trade tensions between the U.S. and China could continue longer than expected, investors said Wednesday that strong demand for corporate debt persists, given paltry government-bond yields and a recent run of encouraging U.S. economic data.

While it has ticked up in recent days, the extra yield, or spread, that investors demand to hold investment-grade bonds over Treasurys still finished Tuesday at 1.14 percentage points, down from 1.53 percentage points at the end of 2018, according to Bloomberg Barclays data. That decline has come as the average U.S. Treasury yield has also dropped to 2.39% from 2.62%, largely due to signals from the Federal Reserve that it won't raise interest rates this year.

"Notwithstanding mark-to-market wiggles and near-term political jitters, the fundamentals of the global economy look decent, especially the U.S. economy, and companies are being opportunistic and issuing while they can," said Mike Collins, a portfolio manager at PGIM Fixed Income.

The Dow Jones Industrial Average stabilized Wednesday, a day after logging its largest one-day decline since Jan. 3.

But Tuesday's stock declines hardly slowed the bond market. Along with the Bristol-Myers sale, businesses with speculative-grade credit ratings, including United Continental Holdings Inc. and power company NRG Energy Inc., announced and then sold $5.4 billion of bonds on Tuesday. That was the first time so-called drive-by issuance has totaled at least $5 billion in more than two years, according to LevFin Insights.

Meeting solid demand from investors, IBM on Wednesday was able to reduce the spread on its longer-maturity bonds by 0.1 percentage point from initial guidance, somewhat less than Bristol-Myers a day earlier. IBM sold $3.25 billion of 10-year bonds at a 3.53% yield, or 1.05 percentage-point spread, compared with initial guidance of 1.15 percentage points.

Appetite for newly issued corporate bonds extended into the secondary market. Bristol-Myers' new 3.4% bonds due 2029 traded late Wednesday at 99.364 cents on the dollar, translating to a yield-premium of 0.99 percentage point relative to Treasurys, according to MarketAxess. The bonds were sold Tuesday at 99.125 cents and a 1.05 percentage-point spread.

Both IBM and Bristol-Myers notably carry high credit ratings even by the standards of investment-grade companies. Despite a roughly $50 billion debt load that will grow with the Red Hat purchase, Moody's Investors Service said in October that it will likely downgrade the company by just one notch to A2 from A1 after completing a review. IBM has said it will suspend share repurchases in 2020 and 2021 to pay down debt.

Moody's similarly indicated last week that it would likely downgrade Bristol-Myers' credit rating one notch to A3 from A2. That sets both businesses apart from many others that have recently settled at the bottom rung of the investment-grade credit ladder, a trend that has raised concerns about downgrades to junk if there is an economic downturn.

IBM last month reported a third consecutive quarter of declining revenue, which it blamed in part on clients in the Asia-Pacific region delaying business decisions. The company's planned acquisition of Red Hat, an open-source software and services company, is part of IBM Chief Executive Ginni Rometty's larger effort to revitalize the computing giant by focusing on its cloud-computing business. The deal, valued at around $33 billion, is IBM's largest-ever acquisition and is expected to close in the second half of the year.

An IBM spokesman said the company "has a strong balance sheet," and would be able to use the cash it generates to invest in "high value-segments of our industry as well as provide continued dividend growth."

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

May 09, 2019 02:47 ET (06:47 GMT)

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