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Floating rate notes see revival in US

Defensive play against interest rate hikes spurs new FRN issuance.

Floating rate notes (FRN) are seeing a revival. More than $24 billion of floating rate notes have been issued this year. “We are almost at 50% of last year’s issuance in floating rate notes,” says Anne Daley, managing director and senior syndicate banker at Barclays.

Several large and longer-dated deals launched this month indicating a return in confidence. IBM issued $1bn of two-year notes at three-month Libor minus 2bps, and AT&T issued $1.25bn of three-year floaters at 38.5bps over three-month Libor.

Daley cites a confluence of factors driving the recent resurgence in floating rate notes. “Banks always have a natural need for floating rate paper. Industrials, meanwhile, have tended to gravitate to the fixed rate market, particularly in the low rate environment of the last few years. What we’re starting to see is a gradual migration of industrial issuers back to the floating rate market to take advantage of renewed investor demand and balance out their funding mix.”

Financials are dominating issuance. Of the $64 billion in FRN issuance last year, almost $42 billion was from financials. And of the $24 billion in issuance this year, over $13 billion is accounted for by financials.

Daley says investor appetite is returning. “From an investor standpoint, floating rates notes are a defensive play against rising rates. Also, increased appetite for these securities indicates a return of confidence in the credit markets.”

The release of Federal Reserve minutes this week – increasing the risk of a sooner-than-expected tightening of policy – is likely to galvanize further FRN issuance.


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