New York, Jan. 30 - As markets brace for the worst corporate defaults since the Great Depression, torrents of cash are flowing to America's highest-quality companies, pushing their borrowing costs to record or multiyear lows.
Wal-Mart Stores offered its lowest interest rate ever, just 3 percent, when the world's largest retailer sold corporate bonds this month, and investors still clamored to get their hands on the deal.
Walt Disney Co, McDonald's Corp and Procter & Gamble are also selling debt at or near their lowest rates in years even as a global credit crunch chokes off funding to weaker companies on any terms.
"There certainly is a flight to quality for debt right now," said Wal-Mart spokesman John Simley. "There's so little high-grade corporate debt to fill portfolios ... This provided a nice window for us."
Corporate bond sales are picking up as low rates on U.S. Treasuries push investors to seek higher yields on slightly riskier corporate debt. The same flight to quality that sent Treasury yields to their lowest in decades is now trickling down to brand name companies that can weather the recession relatively well.
"People are identifying the top credits and everyone's piling into them," said Bob Bishop, portfolio manager for SCM Advisors in San Francisco.
'BRUTAL' MARKET FOR LOWER TIER
After debilitating losses battered Wall Street last year, investors began shunning financial company bonds, forcing banks to issue debt under a special FDIC guarantee program. In the traditional corporate bond market, that left investors chasing a smaller pool of strong industrial debt.
Investors are especially flocking to companies that make essential products, like Procter & Gamble, or those that appeal to cost-conscious consumers, like McDonald's and Wal-Mart.
Procter & Gamble, the world's largest consumer product maker, sold five-year notes in December at a 4.6 percent yield, a deal that was "significantly oversubscribed," said chief financial officer Jon Moeller.
"There was very strong demand and the absolute yield is the lowest in quite a number of years" for the company's five-year debt, Moeller said.
Procter & Gamble lowered its profit and sales forecast for the year on Friday after sales slowed in its fiscal second quarter, but its new five-year notes were little changed after the news. Moeller said the company's cash flow remains strong and it is committed to preserving its debt rating, now "AA-minus," the fourth-highest investment grade.
"There's what I'll call a cliff in the credit markets and for low-grade issuers, even low investment-grade issuers, this is a brutal environment," Moeller said.
As consumers and businesses slashed spending, the U.S. economy shrank at its fastest pace in nearly 27 years in the fourth quarter, government data on Friday showed. The deepening recession could push the default rate on junk-rated corporate bonds to 15.3 percent this year from 4.4 percent at the end of 2008, Moody's Investors Service warned this month.
That grim prospect is keeping investors in the safest corporate bonds, no matter how low the yields.
"If you have a choice between either expensive, high quality or things that might default, it's a bad choice," said SCM Advisors' Bishop.
WALL STREET OUT, HAMBURGERS IN
Strong demand has pushed yields on some McDonald's three-year notes to a tiny 2.15 percent, according to MarketAxess. Bonds issued by banking giant Citigroup with a similar maturity are yielding four times as much, or 8.75 percent. Citigroup is rated "A2," one notch higher than McDonald's, though the bank is on review for a downgrade amid massive losses that forced it to accept a government bailout.
"You have a traditional case of too much money chasing too few assets in the classification that people want to be in," said Don Galante, senior vice president of fixed income at MF Global in New York. Still, he said, high-quality industrial bonds are offering fair value, especially when safer alternatives like money market funds are yielding close to zero.
Walt Disney Co sold five-year notes in December yielding 4.5 percent, its lowest rate on five-year debt in over three years, according to Thomson Reuters data. In 2006, before the credit crisis, it paid 5.7 percent to borrow for five years.
"There aren't a lot of great alternatives," with five-year Treasuries yielding less than 2 percent, said Matthew Freund, who manages about $2 billion of fixed-income investments at USAA in San Francisco.
"If you're an insurance company, if you're a pension fund, if you are a money manager, after expenses and taxes that doesn't leave a lot," he said.