What the Semiconductor Shortage Has to Do With Corporate Bonds

At first glance, the business of selling chips doesn’t have much in common with the business of selling the debt of blue-chip companies.

But as the semiconductor industry contends with a massive shortage of components while customers clamor for supply, it’s beginning to more closely resemble the market for U.S. corporate bonds in terms of how these much-desired assets are allocated.

While it may sometimes seem like the world is swimming in debt, there often aren’t enough new bonds to go around for big investors who are hungry to pad their accounts with something that generates yield. Being allocated new corporate bonds when they are first sold, or issued, is a valuable thing for investors in a world where it’s often a struggle to generate returns. As with the first day ‘pop’ expected in IPOs, bond investors lucky enough to nab a slice of hot new deals can often quickly flip them for an outsized profit.

Demand has consequently often overwhelmed supply for new bond deals. A $49 billion sale of bonds by Verizon — still the biggest corporate debt deal in history — attracted $100 billion worth of orders, for instance. A $17 billion sale of bonds by Apple Inc. in 2013 received more than $50 billion of orders, while Dell sold $20 billion worth of debt after investors put in orders of more than $80 billion.

That brings us to one of the notable things about corporate bonds, which is the way in which new ones are allocated. Syndicate bankers who are hired by companies to help sell their debt have described this process as ‘more art than science’, and deciding who gets what in a hot bond deal is often a contentious process. Larger customers of the firm, or those who are more likely to buy bonds in the future (such as the Pimcos and BlackRocks of the world) often get first pick, while smaller firms may be overlooked entirely.

Because of this, there’s a tendency for these smaller investors to pad their order books — often requesting a lofty amount of debt in the hopes that they might get some. Those left out are likely to grumble that the bonds could have been sold at a much tighter spread to smaller investors, meaning companies would have paid less in funding costs overall.

The worry now is that there’s a similar dynamic now at play in the semiconductor market and that customers who fear they can’t get as many chips as they need might now be now padding their orders in order to make up for the difference.

Meanwhile, car companies have already been accusing semiconductor manufacturers of playing favorites and prioritizing deliveries for the consumer electronics companies which provide the bulk of their sales.