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Why Are Companies Selling Bonds Right Now?

For some companies, it’s a logical response to an uncertain financial future caused by Covid-19.

Why Are Companies Selling Bonds Right Now?
Photo by Ken Wolter (Shutterstock)

With Covid-19 escalating in Minnesota and across the nation, financial uncertainty abounds. But despite the loom of a recession, big companies have been able to obtain funds through bonding––in what could be an optimistic sign. Ameriprise Financial, Allete, and Ecolab are among the latest Minnesota companies that have secured funds through bonds.

While corporate bond issues are normal occurrences for companies, the financial market is anything but normal right now, said Murray Frank, a finance professor at the University of Minnesota’s Carlson School of Management.

“If you look at the [markets], it’s almost reminiscent of the last financial crisis. But if these firms are able to lock in money, I would say that’s sort of tentatively good news,” Frank said.

This week, Ecolab obtained $250 million at a 4.8 percent rate due in 2030, according to SEC filings.

Other SEC filings showed Allete Inc. has secured a total of $140 million in the company’s first mortgage bonds. Of that, $46 million is due in 2030 at a 2.5 percent interest rate, and $94 million is due in 2050 at a 3.3 percent interest rate.

Ameriprise Financial reported Tuesday that it expected to close on a sale of $500 million in senior notes at 3 percent interest due 2025. Adding to the mix, Target also just secured significant bond funds of its own.

“In a real financial panic, it’s very hard to raise money, because no one will accept anything but cash, and that does not seem to be what’s happening here. Quite the reverse,” Frank said. “Companies are trying to be cautious by locking in money while they can get it. And I understand that. We are in an environment where there are a lot of uncertainties.”

Securing low interest loans through bonds sales is a logical response to the uncertain financial future caused by the pandemic, he said.

“It’s easy to understand why they might want to lock it in now, rather than risk having the market seize up, right?” Frank added. “The feds have been taking pretty aggressive actions to try and prevent the markets from seizing up, and so far it seems to be working.”

The lower interest rates show confidence in these corporations, as they’re deemed a safe investment, said John Barnidge, the managing director of equity research at Piper Sandler & Co. who covers Ameriprise.

“It probably means the credit market is coming unlocked,” Barnidge said. “We’ve had a lot of financial vulnerability over the last month. I would say they’re taking advantage of low interest rates.”

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