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By Christopher Whittall 

LONDON -- Investors are now paying for the privilege of lending their money to companies, a fresh sign of how aggressive central-bank policy is upending conventional patterns in finance.

German consumer-products company Henkel AG and French drugmaker Sanofi SA each sold no-interest bonds at a premium to their face value Tuesday. That means investors are paying more for the bonds than they will get back when the bonds mature in the next few years.

A number of governments already have been able to issue bonds at negative yields this year. But it is a rare feat for companies, which also ask investors to bear credit risk.

The move has been driven by the European Central Bank's expansion this summer of its bond-buying program from government to corporate debt, creating more demand for bonds and pushing down their yields. But even if the pricing is explainable, some investors are still trying to come to terms with the idea.

"We're trying to get our heads around it," Edward Farley, head of European corporate bonds at PGIM Fixed Income, said of Tuesday's deals. "It seems pretty bizarre to ask a corporate to look after your money and give you back less in two to three years' time."

It may seem counterintuitive to buy bonds at a price that guarantees a loss going in. But investors have limited options given even deeper negative yields on much government debt and the costs of holding cash. Some may be betting that central-bank buying will drive prices even higher, letting them sell the bonds for a profit before they mature. Others may be required to invest in certain types of bonds.

Henkel, maker of Persil detergent and Loctite caulks, sold a EUR500 million ($558 million) bond that matures in two years, while Sanofi, an international pharmaceuticals company, sold a EUR1 billion bond that comes due in January 2020, according to deal notices released to investors. Both deals will put buyers only narrowly in the red -- they each priced with a yield of minus-0.05% -- and both were part of larger packages that included bonds with low but positive yields, the notices said.

"With interest rates reaching record lows, we decided to be opportunistic," a spokeswoman at Sanofi said.

Henkel declined to comment.

Yields on corporate debt have plunged in recent months as investors have pushed up prices in the scramble for returns. Roughly EUR706 billion of eurozone investment-grade corporate bonds traded at negative yields as of Sept. 5, or over 30% of the entire market, according to trading platform Tradeweb, up from roughly 5% of the market in early January.

Tuesday's deals, however, are among just a handful of corporate offerings that have actually been sold at negative yields. They include offerings of euro-denominated bonds earlier this year by units of British oil giant BP PLC and German auto maker BMW AG, according to Dealogic. Germany's state rail operator, Deutsche Bahn AG, also has issued euro-denominated bonds at negative yields.

The ECB launched its corporate bond-buying program in early June and had bought over EUR20 billion of corporate bonds as of Sep. 2. Most of its purchases came in secondary markets, where investors buy and sell already issued bonds. The central bank meets Thursday and will decide if it should expand its current bond-buying program.

The purchases have helped set off a burst of issuance following the traditional summer lull in local capital markets. Last month was the busiest August on record for new issuance of euro-denominated, investment grade corporate debt, according to Dealogic.

Also on Tuesday, commodities group Glencore PLC sold about EUR1 billion in bonds in one of its first forays into capital markets since its shares and bonds were sold off last fall amid concerns over debt levels and falling commodity prices. Glencore said it would use the proceeds to pay down debt.

Central banks around the world have adopted increasingly aggressive efforts to boost weak economic growth. A number have pushed their benchmark interest rates into negative territory. Others have bought government bonds to pull down interest rates. The ECB is buying corporate bonds as well, while the Bank of England is expected to start its own purchases of such securities in mid-September.

It isn't clear that the approach is working; ECB President Mario Draghi said in July that the bank had seen a continued increase in demand for loans from companies and households during the second quarter, as ECB policy significantly improved borrowing conditions. Yet while companies are raising more money, analysts believe they are sitting on much of it or using it to refinance more expensive debt.

The ECB's latest survey of bank lending in the euro area, published on July 19, found that companies were borrowing more to take advantage of low interest rates, to pay down debt and build up inventories or working capital, and to carry out deals. But the number of companies borrowing to make fixed investments slid further in the second quarter, the survey found.

Nonfinancial corporations in Europe, the Middle East and Africa had EUR921 billion in cash balances as of December, according to a report from Moody's Investors Service on the companies it rates, up about 5% from a year earlier.

Many companies are holding back from spending for the very reason that central banks are launching their stimulus: poor economic prospects.

"Companies need a compelling argument to expand their businesses, either through investment or acquisition, based on an upbeat economic outlook and limited risks in the near term," said Zoso Davies, a credit strategist at Barclays PLC.

Some economists believe measures like negative interest rates may spur greater caution on the part of businesses and consumers by expressing central-bank fear over the economic outlook.

Meanwhile, investors are faced with portfolios of negative-yielding bonds and pension funds with yawning deficits to fill. Around $13 trillion worth of bonds traded with a negative yield in late August, according to J.P. Morgan Asset Management. At the beginning of 2014, the figure was close to zero.

The lurch lower in borrowing costs is benefiting U.S. companies. They have accounted for just over one-fifth of the investment-grade new issuance in euro-denominated debt this year, according to Dealogic, more than any other single country.

Some investors also are shifting from European debt into U.S. corporate bonds, which offer higher returns. That further pushes down borrowing costs for American companies.

"Most well-rated companies now have funding opportunities at zero or negative yields," said Mark Lynagh, head of EMEA investment-grade corporate bonds at BNP Paribas SA. "That's the environment we're in."

Tom Fairless, Scott Patterson, Noemie Bisserbe, Ellen Emmerentze Jervell and William Wilkes contributed to this article.

Write to Christopher Whittall at christopher.whittall@wsj.com

(END) Dow Jones Newswires

September 07, 2016 02:47 ET (06:47 GMT)

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