Companies have issued $ 140 billion in the U.S. junk bond market over the past three months, surpassing a record cash flow in the second quarter of 2020 when groups rushed to secure funding to survive the shock of the coronavirus.
The data, assembled by Refinitiv, shows how even riskier borrowers have been able to take advantage of low borrowing costs to finance acquisitions, pay dividends to owners and refinance existing debt.
It is also the latest sign of the magnitude of the rebound from a year ago, when high yield bonds were among the assets under intense pressure during a period of turbulence in financial markets.
“It’s shocking,” said John McClain, portfolio manager at Diamond Hill Capital Management. “I didn’t expect this. But at this point, I don’t expect a slowdown anytime soon.”
The three largest quarters of issuance on record have all fallen in the past 12 months, helping to propel the size of the U.S. high yield market to a record $ 1.5 billion, according to data from Ice Data Services , up from $ 1.2 billion at the start of last year. . This large-scale issuance also means companies will have more debt that will need to be refinanced later, which should boost future issuance volumes.
Investors flocked to junk trades as low interest rates pushed them to seek higher yields in riskier markets, building on the entrenched US economic recovery and helping build corporate capacity. badly rated to repay their debts.
Cash-strapped cruise operator Royal Caribbean has raised $ 1.5 billion this week to refinance future debt over the next two years, according to people familiar with the deal, while still burning a quarter of billion dollars per month as ships stay docked due to the pandemic, according to regulatory filings.
Earlier this month, retailer Neiman Marcus, which collapsed last year, raised $ 1.1 billion – up from $ 1 billion due to investor demand – to refinance loans taken out for finance its exit from bankruptcy. Cinema operator Cinemark and ailing airline American Airlines also issued bonds earlier this month to pay off existing debt.
It has also proven to be a lifeline for many energy companies who have found a more receptive investor base after a sustained rally in the price of oil.
The demand for high yield bonds has even allowed some companies to give their owners exceptional wages. Communications firm Liberty Latin America raised $ 820 million this week to refinance debt and pay shareholders $ 250 million. Mortgage lender Loan Depot used a $ 600 million bond to both pay off debt and fund a special dividend, according to people familiar with the deal.
However, some investors and analysts are starting to signal a more cautious approach as rising inflation expectations push down the prices of U.S. government bonds, which have started to push down bad bonds.
“Right now the market is favorable so you see a flood of issues,” said Gary Pokrzywinski, chief investment officer at Strategic Income Management, an asset management company specializing in corporate debt.
“If the markets start to struggle, they will stop. High yield issuers learned a long time ago that they need to come to the market early to refinance their debt. So when the markets are open, you see a flood of bonds. “