A host of small- and mid-sized companies have recently increased the size of their bond offerings as new minimum thresholds began this week for the dominant US fixed income benchmark index.
The Bloomberg Barclays US Aggregate index, widely tracked by portfolio managers, began the second quarter requiring the inclusion of debt issues of at least $300m in size, up from a previous minimum of $250m. On Monday, more than $170bn of debt from 866 issues fell out of the index after the changes took effect.
Groups including asset manager Eaton Vance have embraced the larger bond size requirement in recent weeks as they seek to keep their debt included in the benchmark index that attracts funds tracking the index, including some of the most actively traded fixed income exchange traded funds.
Bankers have advised their corporate clients that they may be able to tighten pricing terms on new deals should they qualify for the index, given the larger potential pool of investors.
On Monday, Eaton Vance borrowed $300m through US bond markets to redeem a $250m debt that matures this year, motivated in part by the effect of the index restrictions.
“There are a subset of investors who are not going to be investing in non-index eligible bonds,” said Steven Oh, the global head of credit and fixed income at PineBridge Investments. That “creates the conditions for less liquidity, particularly at some point in the future as you reduce the buyer base”.
He added: “When there is more volatility . . . if the bonds are not eligible for index inclusion there is a greater risk the price of the bond [could] gap down.”
This year CubeSmart, a real estate investment trust, and RPM International, a manufacturer of specialty chemicals and sealants, both topped up existing $250m bonds by $50m, allowing the groups to make the cut-off for the index.
RPM’s bonds rallied after it announced it would increase the size of its 30-year bonds in late February. The debt now trades with a yield of 4.69 per cent, down more than 50 basis points from levels just before it increased the bond size to $300m. By contrast, similarly maturing and rated debt has weakened over the same period, rising 9 basis points to yield 4.91 per cent, according to Bank of America Merrill Lynch.
The yield on CubeSmart’s 2025 bonds has fallen 10 basis points since it upsized its outstanding debt last week.
But other fund managers are less convinced that the index changes will have a significant impact on appetite for corporate debt. James Sarni, managing partner at Payden & Rygel, said: “I would always prefer a bond is in the index, but I wouldn’t necessarily not buy it or not trade it because it is not. There are a lot of other things that are more important than that.”
The spread on the US Aggregate index — or difference between the yield on the index and the yield on corresponding Treasuries — remains close to record lows at 1.18 per cent, underlining strong investor demand even as the total yield on the index has risen in line with expectations of higher interest rates.
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