(Bloomberg) — A handful of blue-chip U.S. companies are starting to pay back the $350 billion that investment-grade corporations borrowed in total to get through the coronavirus pandemic.

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Target Corp. and CVS Health Corp. have recently announced that they are buying back investment-grade bonds, using cash plus in the case of CVS, some borrowed money as well. AT&T Inc. said last month it plans to use excess cash to further reduce debt.

It’s unclear how many companies are joining in. Investment-grade corporations saw their indebtedness rise to a record high in the second quarter by at least one metric, according to a report from Barclays Plc on Sept. 30: the ratio of total debt to a measure of earnings known as Ebitda climbed to 4 times, compared with figures that since 1990 have ranged between 2 and 3 times.

That unusually high ratio worries some debt investors, and explains why some companies are eager to pay down borrowings. Although the Federal Reserve is supporting credit markets, that won’t last indefinitely, and investors still care about companies having the resources to cover their obligations.

“Fed buying has slowed down considerably, and it’s only buying short-term paper outside earlier purchases of exchange-traded funds,” said Terence Wheat, portfolio manager of U.S. investment-grade corporates at PGIM Fixed Income, which oversees $920 billion in assets. “Many companies need to pay down debt once their cash flows improve.”

High-grade U.S. companies in the fourth quarter will probably pay back more of the estimated $350 billion they borrowed to boost liquidity during the pandemic, according to Hans Mikkelsen, head of high-grade credit strategy at Bank of America Corp.



chart: Debt Diet?


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Debt Diet?

For now, companies that are performing relatively well during the pandemic, in industries like technology, telecom, and healthcare, are more likely to be comfortable paying back debt, according to Dominique Toublan, head of U.S. credit strategy at BNP Paribas SA. Meanwhile, industries like travel, leisure and industrials, are likely to wait until the economy turns, he said.

AT&T had more than $175 billion in long-term debt outstanding as of mid-2020, making it the most indebted company outside the financial industry. It has slashed its net borrowings by about $30 billion since the close of its purchase of Time Warner in 2018. Since the first quarter of 2020, it has extended maturities on about $30 billion of near-term obligations, the company said in a statement in September.

Target is buying back as much as $1.75 billion of notes through a tender offer and hasn’t announced new debt to fund the repurchase. The cheap-chic retailer borrowed $2.5 billion in March amid the pandemic and held the funds in reserve. Now it’s posting record profit, and is reducing debt because its liquidity is ample, according to a spokeswoman.

CVS Health said in August it was buying back $6 billion of notes maturing in 2023 and 2025 in a tender offer, but only raised $4 billion in new debt as part of its near-term efforts to reduce leverage. The drugstore giant has made paying down debt a priority, it said in a presentation it posted last week.

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High-grade companies have found that the cost of moving into a lower ratings tier within the investment-grade spectrum is small, according to Citigroup strategist Daniel Sorid. That’s leading to a gradual erosion of quality that’s difficult for corporations to get out of when faced with a major economic shock, and many companies came into the pandemic with too much debt anyway, he added.

“You entered the pandemic with dozens of U.S. high-grade companies, carrying around $1 trillion of debt in aggregate, pledging to pay down debt or grow their way into lower leverage,” Sorid said. “That’s going to a be a lot harder to achieve in this economy than many credit investors realize today.”

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