Does this ring a bell? - Norfolk Southern in 100-year issue
My thanks to a subscriber for this short item from the Financial Times
Norfolk Southern, a railway operator, sold 100-year bonds as companies seized upon rock-bottom interest rates to borrow for the long term.
The company sold $250m in the bonds, more than twice the $100m minimum announced, with a yield of just 5.95 per cent by reopening an existing century bond that it sold in 2005. It is an attractive rate for a company that is rated Baa1 by Moody's Investors Service and triple B plus by Standard & Poor's.
Uncertainty about economic growth has prompted a rally in US Treasury bonds, sending benchmark yields near all-time lows. Investors have also flocked to corporate bonds since the financial crisis as a middle ground between low yielding government debt and stocks.
That combination has enabled some companies, such as IBM and Johnson & Johnson, to sell bonds at the lowest rates ever.
"We decided to [sell the bonds] because rates are so low and there is strong appetite for 100-year bonds," said Robin Chapman, a spokesman for Norfolk Southern.
Norfolk is believed to have achieved the lowest yield for 100-year debt, a person familiar with the deal said.
Its 2005 century bonds were also the last marketed in the US, according to Dealogic. Other issuers have included Coca-Cola, Federal Express and Massachusetts Institute of Technology (MIT), but such bonds are not commonplace.
They are a good match for insurance companies who have long-term liabilities that they need to balance with long-term assets, but other investors were sceptical.
"You are giving a company money for a long period of time with no ability to foresee the conditions in that period of time and for a very low interest rate," said Jason Brady, a portfolio manager at Thornburg Investment Management.
Investors who bought Ford's century debt at a higher rate in an issue from 1997 saw their bonds fall to less than 15 cents on the dollar when the US car industry was in crisis over the past few years, Mr Brady said. They have since recovered, but still trade at less than 90 cents on the dollar. The price of bonds also falls when rates rise.
David Fuller's view This is very good news for companies which are arranging ultra long-term financing at historically low rates. However it may contribute to a supply glut for buyers of these instruments. Moreover, when interest rates rise, as they eventually will, the market value of these ultra long-term bonds will move significantly below par.
Is there an aspect to these 100-year issues of: 'I won't be here; you won't be here, so who cares?'