A generation of new arrivals to the US junk bond market have propelled it to a record size, with debut issuers borrowing cash cheaply from investors eager for yield.
A record 149 companies, including cryptocurrency exchange Coinbase and medical supplies manufacturer Medline, have joined the high-yield bond market this year, where lower-rated, riskier companies borrow money from large asset managers, pension funds and other investors, according to data provider Leveraged Commentary & Data.
The companies have extended a trend set in motion by central bankers’ historic response to the onset of the coronavirus pandemic, when they lowered interest rates and began injecting liquidity into financial markets to ward off a more severe downturn.
Companies eager to raise cheap funds have been met by investors desperate to put cash to work, especially in assets such as corporate junk bonds that yield more compared with government debt. As more-established debt issuers have tapped the market, bankers have looked to new companies to maintain the flow, aided by bumper buyout activity that has created a need to finance acquisitions.
“A lot of those deals are made possible by a very low cost of capital and with that you see more issuers coming into the high-yield bond market,” said Chris Blum, head of leveraged finance at BNP Paribas. He added that many companies had also refinanced so-called leveraged loans in favour of high-yield bonds, fixing low borrowing costs before they start to rise.
The deluge of issuance has increased the face value of outstanding debt in the high-yield bond market above $1.5tn for the first time, according to a widely tracked index run by Ice Data Services.
A total of 26 new corporate issuers came to market in September, a record equalled just once before — in April, according to records dating to 2005. Already, 13 new issuers have been welcomed in October, making up a quarter of the notional dollar value raised in the junk bond market. The online gaming platform Roblox was set to add to the tally on Tuesday, according to people familiar with the deal.
New entrants have marched in before. More than 100 joined in both 2013 and 2014 just before a collapse in oil prices roiled the market which had financed the growth of the shale energy industry. The only other year to record more than 100 new entrants was 2007, just before the global financial crisis.
The trend has intensified concerns about the widespread availability of capital and increasing corporate debt piles. The IMF recently warned that rising financial leverage, driven by investors’ search for yield, could “exacerbate existing vulnerabilities” in the financial system.
Investors have also noted the challenge of conducting due diligence on the companies they lend to. The work needed to become familiar with new issuers, the short time between the launch and completion of new deals — often just a day — and the sheer volume of debt being provided have caused worries.
“A lot of this issuance, like a lot of things we are seeing, is just a byproduct of the excess liquidity we have in the system,” said John McClain, a portfolio manager at Brandywine Global Investment Management. “We are seeing excessive amounts of capital chasing returns and trying to find a home. I don’t think it’s going to slow down any time soon.”