By Patrick McGee
Walt Disney Co. (>> The Walt Disney Company) borrowed $800 million Tuesday, issuing its first batch of so-called floating-rate notes since 2007.
Floating-rate notes are a type of debt that pay investors an interest rate that resets every quarter, and Disney was among a small club of companies able to sell theirs at rates below the London interbank offered rate, or Libor, since the financial crisis.
Floating-rate notes enable companies to sell bonds tied to a different benchmark than those linked to U.S. Treasurys, offering diversity for buyers wary of rising interest rates.
"It's a way to hedge against interest-rate risk while continuing to be in corporates," said Sean Simko, portfolio manager at SEI Fixed Income Management.
Libor is an industry standard based on the interest rate banks charge to lend to one another. Selling bonds below Libor indicates investors are more comfortable lending to some companies than banks are lending to each other.
Disney's notes were priced at 0.01 percentage point less than Libor, which is currently 0.30%. A year ago it was 0.52%.
Nonfinancial companies had already sold $7.9 billion of floating-rate notes this year through Monday, marking a year-to-date record in Dealogic data going back to 1995. In the same period last year, $3.5 billion was priced.
The uptick in issuance is likely to continue this year as front-end accounts--investors with short time horizons--become more comfortable extending the maturities of their investments, according to Anne Daley, senior syndicate banker at Barclays.
"It definitely shows confidence returning," she said. "After the credit crisis, front-end accounts started to pull in the reins on how far out they would buy bonds. The market for [longer-dated issues such as] two- and three-year floating-rate notes had dried up."
James Barnes, senior fixed-income manager at National Penn Investors Trust Co., said great demand for floating-rate notes is limiting the extra yield these notes pay over Libor but, even so, they are valuable for investors who want protection against climbing interest rates.
"Returns may be miniscule, but you're diversifying your portfolio," he said.
The Disney deal is the second floating-rate deal to price below the Libor rate this month. Last week, IBM Corp. (>> International Business Machines Corp.) sold $1 billion of notes at 0.02 percentage point less than Libor. Last year, Procter & Gamble Co. (>> The Procter & Gamble Company) and Coca-Cola Co. (>> The Coca-Cola Company) each priced notes below Libor. Before the financial crisis, this wasn't so rare, Ms. Daley said.
Mr. Barnes hasn't been active in the area because the market is small and sometimes difficult to trade in, he said. He plans on buying floating-rate Treasury bonds, which are widely expected to be offered within the next year.
Other investors don't see the value just yet.
"I don't think short-term rates are set to rise materially for the balance of the year, so owning a floating-rate is like having insurance that you might not really need for a while," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management. Mr. Jacobsen said he would prefer junk-rated bonds, which are less sensitive to rising interest rates than higher-quality fixed-rate bonds.
"I wouldn't be scraping the bottom of the junk barrel for yield, but the stuff closer to the top can give you a good yield for the risk you take," he said. Some of Wells's funds do own floating-rate notes, "but it's very selective.
Disney, which last year acquired "Star Wars" maker Lucasfilm Ltd. for $4 billion, said the deal would raise cash for general corporate purposes. Fitch Ratings said it expects the company to replace short-term debts called commercial paper, which totaled $3 billion at year-end.
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