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U.S. Junk Bonds Set $432 Billion Record in Rush to Beat Rates

·4 min read

(Bloomberg) -- U.S. high-yield bond sales reached an annual record of $432.4 billion on Tuesday as companies rush to lock in low coupons while they still can.

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Cheap funding costs have unleashed a prolonged pile-on of debt issuance, and borrowers have been hurrying to take advantage of the opportunity before the Federal Reserve eventually raises interest rates. That could come sooner than expected amid inflation pressures, though Federal Reserve Chair Jerome Powell is still preaching patience as of last week.

This dash has taken 2021’s issuance beyond 2020’s high mark $431.8 billion, which topped a prior record set in 2012, according to data compiled by Bloomberg.

“Funding markets are wide open,” said Nichole Hammond, a senior portfolio manager at Angel Oak Capital Advisors LLC. “Credit fundamentals are improving with decent economic growth and there is still strong demand for income yielding assets.”

The frenzy might not last much longer. Analysts at Bank of America Corp. think U.S. junk bond issuance will contract by 15% next year as volumes decelerated in recent months. And Goldman Sachs Group Inc. is anticipating a 25% drop to $325 billion in 2022. “With record cash on hand, and a large portion of refinancing already accomplished, 2022 is likely to bring a sharp slowdown in the U.S. high-yield supply versus the past two years,” wrote Goldman Sachs analyst Amanda Lynam.

Cheap Debt

Companies raised billions of dollars of debt at the start of the Covid-19 pandemic as a cash cushion after the U.S. central bank began purchasing some bonds as part of its efforts to prop up corporate credit. And although the Fed announced the end of this program in June, it didn’t dampen investors’ confidence.

Read more: As Fed Exits Credit, Investors See ‘Helicopter Parent’ Close By

Some of the deals driving volumes this year have come from the same companies as they’ve returned to the bond market to refinance those expensive 2020 borrowings with cheaper rates.

Cruise line operator Carnival Corp. tapped the bond and loan markets to refinance costly debt, including a now-repaid 11.5% bond issued near the onset of the pandemic. Royal Caribbean Cruises Ltd. made a similar move, Delta Air Lines Inc. has also started chipping away at its balance sheet, and United Airlines Holdings Inc. borrowed to refinance some liabilities and to bolster cash.

“Companies are looking at today’s rate environment and thinking, ‘Maybe I can’t get that coupon next year, and the liquidity is there, so let me push through my refinancing and get it done,’” said Noel Hebert, director of credit research at Bloomberg Intelligence.

The average yield for the high-yield bond index has remained below 4% for much of this year, hitting record lows in July, according to Bloomberg data. But, it’s been on an upward trajectory as of late, closing at 4.03% as of Monday.

New borrowers have also helped to vault supply to a record this year. At least 87 have sold junk bonds for the first time ever in 2021 for a total of more than $52 billion, according to data compiled by Bloomberg. Colorful clog maker Crocs Inc. made its high-yield entrance and Rupert Murdoch’s News Corp. sold inaugural notes as a wide swath of companies came forward to capitalize on low rates and high demand. Cryptocurrencies even touched the market for the first time when Bitcoin bull Michael Saylor’s MicroStrategy Inc. tapped the market with its debut deal, followed by Coinbase Global Inc.’s offering.

“U.S. high-yield at just north of 4% still looks attractive relative to other assets such as investment grade, and also is better positioned to absorb potentially rising rates with high-yield having a much lower duration profile,” Hammond said.

M&A Return

Acquisition activity dropped during much of 2020 as the world adjusted to Covid-19, but has picked up significantly in the last year. This is leading to bond deals larger in size, Hebert noted.

A group of private equity firms financed the leveraged buyout of medical supply company Medline Industries Inc. with a package that included $7 billion of U.S.-dollar bonds. Platinum Equity acquired supply chain company Ingram Micro Inc. in a deal that featured $2 billion of junk bonds.

In 2020, about 62% of all junk-bond issuance was for refinancing, followed by 29% for general corporate purposes -- which reflected companies raising cash to get through Covid-19 -- and only 9% for acquisitions, according to an analysis by Bloomberg Intelligence.

Year-to-date in 2021, refinancing makes up 58% of volume, with 19% from acquisitions as activity resumed, and 23% for general corporate purposes, according to the analysis.

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