Must-know: Lessons from the $2 billion issue at Target


Oct. 30 2019, Updated 10:11 a.m. ET

Investment-grade debt (LQD) issuance by sector (Source: Bloomberg) 

Firms in the financials sector made up the largest percentage of borrowers at 47.6% in the week ending June 20. Issuance volumes for financials sector firms came in at $12.3 billion. These included the JPMorgan Chase & Co. $850 million perpetual bond offering and PNC Bank’s $1 billion senior unsecured notes issue.

What are perpetual bonds?

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Perpetual bonds, or perps as they are commonly known, refer to bonds issued without any maturity date (for example—the cash flow from their coupon income stream would go on forever). In that sense, they are more equity-like than debt-like. Like equity capital, issuers wouldn’t repay the principal amount, just go on making the coupon payments in perpetuity. As perpetuals don’t need to be redeemed, these bonds have become increasingly popular with financial institutions like JPMorgan and Citigroup as they are considered part of the bank’s Tier I capital requirement.

Domestic corporate bond issuance

Domestic corporate borrowers issued about $7.5 billion in debt in the week ending June 20. Major transactions included Target (TGT) and Hess Corp. (HES) are part of the S&P 500 Index (VOO).

Target (TGT) made a two-part $2 billion offering. The retailer issued $1 billion each in five-year and ten-year notes, in order to refinance about $1 billion in existing debt. The bonds were priced to yield 2.348% and 3.553%, 0.6% and 0.9% more than comparable five-year and ten-year debt maturities, respectively. The sweeteners were added in order to compensate investors for additional perceived risks.

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Target was the victim of a data breach last holiday season that resulted in millions of customer accounts being hacked. As a result, the chief executive officer (or CEO) of Target, Gregg Steinhafel was forced to resign. This episode underlines the principle of how bond yields are a function of investor risk perceptions and even investment-grade bonds (AGG) aren’t immune to credit risks.

Hess (HES) issued $300 million in 1.3% three-year notes and $300 million in 3.5% ten-year notes last week primarily for refinancing older debt, retiring lease obligations, and general corporate purposes.

Secondary market trends

Investors withdrew $1.97 billion from investment-grade corporate bond mutual funds in the week ending June 18, compared to net outflows of $650.1 million in the previous week (Source: Lipper). We discussed the possibility of inflows in IG mutual funds in last week’s update. To learn more about this, please read the Market Realist series, Must-know: Analyzing flows in bond mutual funds.



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