Companies’ Debt Sales to Be Flat Next Year

Debt sales by U.S. companies are expected to flatten in 2005 after a strong year, as a buildup of cash on corporate balance sheets reduces financing needs.

Companies will need to refinance maturing debt, and growing merger activity also will spawn some debt sales. But capital spending needs will remain muted, keeping bond issuance roughly on par with this year, many analysts say.

“I think company treasurers and management are going to be somewhat hesitant to add to leverage dramatically in 2005,” said Robert Alley, chief fixed-income officer for AIM Investments in Houston.

U.S. companies sold about $519 billion of investment-grade debt in 2004, up from $506 billion in 2003, according to Dealogic. Companies took advantage of low borrowing rates, with yields on the average corporate bond remaining well below 5% for most of the year.

Interest rates are expected to climb in 2005, but not dramatically, because inflation remains relatively tame and economic growth is expected to slow.

Although some companies took care of part of their 2005 financing needs in 2004, the flow of deals should remain relatively steady in the new year, said Jim Probert, managing director for Banc of America Securities’ high-grade debt syndicate.

“The calendar will be driven by the things that have driven it all year, which are a still-attractive rate environment and still-attractive credit spread environment,” Probert said.

Credit spreads, the extra yields that corporate bonds pay over U.S. Treasury securities, dipped by 0.1 percentage point this year to an average of 0.83 percentage point more than Treasuries, the lowest since 1998, according to Merrill Lynch & Co. Lower spreads mean lower overall borrowing costs.

Companies had little incentive to add debt for capital spending because there was still excess manufacturing capacity after an investment boom in the late 1990s. Much of this year’s debt issuance was used to refinance outstanding debt, which did not add to overall supply.