Capital MarketsCOVID-19

Bonds in the Time of COVID-19: Timing Is Everything

By March 24, 2020No Comments

Treasury teams need to be prepared to pounce as investor sentiment shifts wildly in capital markets.

Be prepared so you can be nimble. That’s the advice from a treasurer whose company pounced when investor sentiment in the investment grade corporate bond market allowed nine corporates to issue $25 billion in debt on one day this month before the window slammed shut again amid COVID-19 fear.

  • “You have to take what the market gives you and respond to the environment around you, which has seen a bear market in equities and severe liquidity stress in credit markets,” he said during a recent NeuGroup meeting of mega-cap multinationals.
  • Several peers congratulated the treasurer on his team’s ability to act fast, with one saying, “Thanks for going out there and being our golden child. Thank God you did it yesterday.”
  • Another treasurer said his company is working on a bond offering but wasn’t prepared to tap the capital markets as quickly.

Be prepared to call an audible. The treasurer said his company has had a liquidity planning playbook since the 2008 financial crisis and had been looking to tap the capital markets for the last month. The market’s violent swings forced him to change the company’s original plans several times.

  • “We pivoted from a debt exchange which exposes you to 10 days of market risk until closing to an unsecured bond offering which gets you in and out of the market in one day,” he explained.
  • “We decided to warehouse liquidity on our balance sheet as a sign of strength, and once the coast is clear we can consider liability management and debt repayment.”

Laying the groundwork. To prepare to act fast, treasury told the board to consider the debt offering as “relatively cheap insurance” even though “it was really scary to dip your toe into this market,” the treasurer said.

  • The company’s ability to take advantage of the open window also involved having disclosure decisions in place. The company filed an 8-K that said, “Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial or operational results, but the impact could be material.”
  • The treasurer received many more calls than normal from investors and relied on the 8-K, which stated, “COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us. Some of these factors could increase the demand for our products and services, while others could decrease demand or make it more difficult for us to serve our customers.”

Hedging advice. Given the volatile nature of markets, the treasurer had this advice for peers looking to reduce interest-rate risk: “I highly encourage folks to do intraday hedging if you’re hedging the market.”

  • As distilled by NeuGroup founder Joseph Neu, “Pre-issuance hedging using the full knowledge base on treasury locks, swap locks, including intra-day rate hedging, and the hedge accounting implications are a must in this market.”
Antony Michels

Author Antony Michels

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