Institutional investors couldn’t get enough of Comcast’s $27 billion bond issuance this week, an oversubscribed deal meant to finance the company's acquisition of broadcaster Sky and one of the largest-ever such deals in the U.S.
Market observers say this is partly because of tax-law changes that were enacted as part of President Trump's massive tax package passed last year. Companies made huge contributions to their pension plans last month to take advantage of a disappearing tax break and needed a place to park the money. September 15th was the deadline to make cash contributions to their pension plans — many of which are underfunded—and use 2017 tax rates on deductions.
Although the new tax plan, which took effect this year, taxes corporate earnings at a lower rate of 21 percent, deductions are also made at the new rate, a big tax hit.
“We saw evidence that there were a lot of corporations making pension contributions last month,” says Matthew Brill, head of U.S. investment grade credit at Invesco. “Now they have to invest this money, so it’s logical they’re buying more corporate bonds. It’s a function of the whole tax code.”
Pension funds and insurance companies are also eager for new bonds that are higher-yielding as interest rates continue to rise. The Comcast deal, which included bonds that don’t mature for 40 years, had almost $90 billion in interest from investors.
The big demand for the 40-year bonds in particular shows how desperate pension funds and insurance companies are for long-dated paper that they need to match to their assets — what’s known as liability-driven investing. Thirty and 40-year bonds' interest payments extend far into the future and match up with pension plans' liabilities, or the promises they’ve made to pay income to retirees for the rest of their lives. The longer-duration bonds also come with higher interest rates.
“Institutions told banks they wanted the longer part of the curve, something more than 30 years. This is the result of those requests,” said Brill.
At the same time, the longer a bond’s duration, the higher the risk, given that it’s hard to know how financially healthy any company will be 40 years into the future. Pension funds that buy these bonds may be making a risky bet, said one bond manager.
Still, investors are showing caution. Brill says the high demand for Comcast’s bonds is also a function of institutions’ hesitance to invest in equities, which most investors believe are richly valued. Bonds will provide a cushion if equities fall from these highs.
“It’s a one-two punch,” says Brill. “More money is being allocated to pension funds because of the September 15th deadline, and then there’s a shift into fixed income because equity markets are on a run.”
The Comcast debt deal, because of its sheer volume, is highly liquid — meaning it is easily bought and sold after the initial issuance. With managers finding it difficult to trade in fixed income markets since the financial crisis, they’re lining up to invest in mega deals.
“They can get their cash invested fast and If they need liquidity on the other side, this can be traded in large sizes, with a slim bid-ask spread,” said Brill.
Comcast's 12-part bond deal included fixed- and floating-rate bonds that ranged in maturity from two to 40 years. The $4 billion it issued in 30-year bonds yielded 150 basis points (1.5 percent) over the U.S. Treasury.