Companies have issued $140bn in the US junk bond market over the past three months, outpacing a record dash for cash in the second quarter of 2020 when groups raced for funding to survive the shock of coronavirus.
The data, collated by Refinitiv, highlight how even riskier borrowers have been able to take advantage of low borrowing costs to fund acquisitions, pay their owners dividends and refinance existing debt.
It is also the latest sign of the scale of the rebound from a year ago, when high-yield bonds were among the assets under intense pressure during a turbulent time in the financial markets.
“It’s shocking,” said John McClain, a portfolio manager at Diamond Hill Capital Management. “I did not expect this. But at this point, I don’t expect any slowdown soon.”
The three biggest issuance quarters on record have all fallen in the past 12 months, helping to propel the size of the US high yield market towards a record $1.5tn, according to data from Ice Data Services, from $1.2tn at the start of last year. This large-scale issuance also means companies will have more debt that needs to be refinanced later, something that is expected to boost future issuance volumes.
Investors have flocked to junk deals as low interest rates have pushed them to seek out higher returns in riskier markets, predicated on the US economic recovery taking root and helping to bolster low-rated companies’ ability to repay their debts.
Cash-strapped cruise operator Royal Caribbean raised $1.5bn this week to refinance debt coming due over the next two years, according to people familiar with the deal, all while still burning through a quarter of a billion dollars per month while ships remain docked due to the pandemic, according to regulatory filings.
Earlier this month retailer Neiman Marcus, which collapsed last year, raised $1.1bn — increased from $1bn due to investor demand — to refinance loans taken out to fund its exit from bankruptcy. Cinema operator Cinemark and struggling airline American Airlines also both issued bonds earlier this month to repay existing debt.
It has also proved a lifeline for many energy companies that have found a more receptive investor base following a sustained rally in the price of oil.
The demand for high-yield bonds has even allowed some companies to give their owners a bumper payday. Communications company Liberty Latin America raised $820m this week to refinance debt and pay $250m to shareholders. Mortgage lender Loan Depot used a $600m bond to both pay down debt and fund a special dividend, according to people familiar with the deal.
However, some investors and analysts are beginning to signal a more caution approach as rising inflation expectations knock US government bond prices, which has begun dragging down junk bonds.
“Right now the market is favourable so you see a flood of issuance,” said Gary Pokrzywinski, chief investment officer for Strategic Income Management, an asset management firm focused on corporate debt
“If markets start to struggle it will shut down. High yield issuers learned a long time ago that they need to come to market early to refinance their debt. So when markets are open you see a flood of bonds.”