September 25, 2023


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Loans Are Cheaper Than Bonds for Some Highly Rated Companies

Loans Are Cheaper Than Bonds for Some Highly Rated Companies

Some highly rated companies are turning to term loans instead of bonds for their financing needs, taking advantage of cheaper pricing as banks adjust more slowly to rising interest rates than the credit markets.

With the Federal Reserve expected to approve another big interest-rate increase Wednesday, finance chiefs are doing the math as they weigh alternative instruments to pay for maturing debt, mergers and acquisitions or other transactions. The Fed rate hike would be its fifth of the year, and bank financing costs usually respond more slowly than bond markets to these Fed actions, with a time lag ranging from several weeks to months, bankers said.

“We are seeing some resurgence in interest in term loans because it is a cheaper alternative for many borrowers,” said James Shepard, head of the investment-grade debt capital markets business at


Americas, an investment and corporate bank. He said the difference in funding costs can be as much as half a percentage point. “These are companies that would have gone for regular bond financing when funding costs were low,” he added.

Companies including business-software firm

Oracle Corp.

, food maker

Conagra Brands Inc.


Philip Morris International Inc.,

a manufacturer of cigarettes and vaping devices, in recent months secured financing via term loans.

Highly rated companies raised $998.8 billion in bonds in the U.S. this year through Monday, compared with $177.9 billion in term loans, according to Refinitiv, a data provider. For all of last year, fundraising through bonds amounted to $1.46 trillion versus $236.7 billion for term loans for investment-grade-rated companies.

“It is a small portion of companies that really have a capital need right now, as many of them tapped financing before,” said

Don McCree,

vice chairman and head of commercial banking at

Citizens Financial Group Inc.

Banks often provide additional services to corporate customers—for example cash management, hedging or underwriting—and therefore can charge less for term loans, he said. “As long as there is ancillary business, the pricing in the bank market can be supported by other revenue streams,” Mr. McCree said.

Term loans often have a shorter duration than bonds, with many of them ranging from three to five years. Companies that agree to take out a loan don’t have to draw on it, which can make it more like insurance than a bond, where investors pay the company soon after the deal has closed. Revolving credit facilities differ from term loans insofar as the borrower can draw funds up to a limit, repay and redraw again. Under a term loan, the borrower usually makes a single draw of funds and commits to pay a fixed amount periodically.

Term loans and revolving credit facilities often have floating rates consisting of a fixed amount plus the secured overnight financing rate, which trades up or down depending on market conditions, while issuers usually agree to pay a fixed rate when they sell a bond.

Conagra, the investment-grade-rated owner of brands including Reddi-wip cream, Slim Jim meat sticks and Birds Eye frozen foods, earlier this month borrowed $500 million under a term loan that it put in place in August. The Chicago-based company said it plans to use some of the proceeds from the unsecured loan to repay longer-term debts maturing during its 2023 fiscal year.

Conagra has about $937 million coming due in bond debt in calendar year 2023, according to S&P Global Market Intelligence, a data provider. The company, which had different financing options, said it chose a term loan due to the “relative strength of the bank loan market.” It last tapped the bond market in August 2021, S&P data show.

While highly rated companies have agreed to an average bond yield of 4% since the beginning of the year, that average yield has gone up to 4.8% for bond sales during the past three months, Citizens said. For bank loans including term loans, companies with a single-A credit rating on average agreed to pay a spread of SOFR plus 103 basis points since the beginning of the year. That average loan spread declined to SOFR plus 92 basis points during the past three months. SOFR traded at 2.27% on Monday, according to the Federal Reserve Bank of New York.

Austin, Texas-based Oracle, a regular issuer of bonds in previous years, in recent months also agreed to funding through investment-grade term loans, including $4.36 billion in July at a cost of 160 basis points plus SOFR, according to Refinitiv. The company has borrowed about $15 billion in term loans since the beginning of the year and skipped the bond market entirely. Oracle sold $14.9 billion in bonds in 2021, including about $2 billion maturing in 2028 for 2.3%, and $19.9 billion in 2020, including roughly $3.5 billion maturing in 2060 for $3.85%, according to Refinitiv. The company declined to comment.

Oracle has borrowed about $15 billion in term loans since the beginning of the year.


David Paul Morris/Bloomberg News

Philip Morris, which in June agreed to $5.8 billion in term loans alongside a bridge facility to fund its offer for

Swedish Match

AB, a maker of lighter and tobacco products, also hasn’t been back to the bond market since 2020. The highly rated company declined to comment.

Bankers have also noted increased interest in term loans among noninvestment-grade-rated companies.

Cheniere Energy Inc.,

a producer and exporter of liquefied natural gas, in June refinanced and upsized a $4 billion term loan and a $1.5 billion working capital facility. It hasn’t advertised bonds to investors this year as it did in 2021 and 2020, when it sold $750 million and $1.8 billion, respectively, according to Refinitiv. Cheniere, which is cutting debt to achieve an investment-grade credit rating, declined to comment.

But term loans can come with limitations.

Royal Caribbean Cruises Ltd.

, a New York-listed cruise operator, last month placed $1.25 billion in bonds with a coupon rate of 11.625%, alongside a second offering of $1.15 billion at 6%. The company, which is working to reduce its debt to levels it had before Covid-19 and has a speculative-grade credit rating, uses term loans to finance its ships, but isn’t relying on such loans to tap funding to pay off maturities, Chief Financial Officer Naftali Holtz said. “The long-term strategy is to get to an unsecured balance sheet. Term loans tend to be secured,” Mr. Holtz said, pointing to the mixture of bonds and term loans that make up the company’s capital structure.

Companies that have maturities in early 2023 and don’t want to wait to lock in financing can take out a term loan now, or enter into a hedge that allows them to sell bonds at a fixed rate.

“If credit markets reprice, they can exit the term loan and tap the bond market instead,” Mizuho’s Mr. Shepard said. “It is cheap insurance, entering into a term loan now.” Still, companies would have to cover the transaction fee, which can vary, depending on the bank.

Write to Nina Trentmann at [email protected]

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