As the US Federal Reserve (Fed) raises interest rates, trying to cool the economy by increasing borrowing costs, companies considered risky have found it harder to take on debt. But companies with low credit ratings, whose debt is often referred to as junk (“junk”), are now taking advantage of a favorable opportunity to borrow more cash.
Posted at 9:00 a.m.
Publicly traded companies, which tend to pay higher rates, have sold $4.1 billion in bonds in the United States since the start of the week, and more deals could be launched, according to Refinitiv. Junk bond issuances have already hit their highest weekly amount since early June, just before investor confidence plummeted, the stock market bottomed and lenders faltered. hijack bonds also known as high yield debt.
A series of better-than-expected corporate results and positive economic data have recently boosted equity markets, reduced volatility and tempered some investors’ expectations for the Fed’s rate hike campaign. The junk bond market has also started to thaw: this week’s issuance exceeded the total for the whole of July.
Still, bankers and investors warn that time could be running out for these risky borrowers looking for new funds. Companies whose debts and payments to lenders are coming due soon have jumped at the chance to refinance.
“Depending on your view of the overall economy, this could be a very good opportunity to exploit the market,” said John Gregory, managing director at Wells Fargo Securities.
Struggling cruise line Royal Caribbean raised US$1.25 billion on Monday, paying a hefty 11.63% interest rate. The company will use the money in part to repay investors who loaned it US$650 million in 2012, which matures in November. When it borrowed that money, before the pandemic crippled the cruise industry, the company had an interest rate of 5.25%.
The recent rise in issuance was helped by four straight weeks of cash inflows into funds buying high-yield bonds, the longest run in nearly a year.
Fear of seeing the market go down turned into fear of missing out.
John McClain, portfolio manager at Brandywine Global Investment Management
However, the market remained closed to the riskiest issuers. The credit ratings of junk bond issuers range from BB to CCC, the lowest echelon. There has only been one operation rated CCC since the end of April.
On Thursday, S&P Global Ratings said it expected 3.5% of junk bond issuers to fail to repay debt over the next 12 months, more than double the rate of 1.4% recorded in the year to June 2022. According to ICE Data Services, approximately US$90 billion, or 6%, of the junk bond market remains in arrears, that is, they are trading at a yield above that of Treasury bonds.
Nick Kraemer, an analyst at S&P Global Ratings, says the lack of a “lending rush” to the riskiest companies signaled some caution on the part of investors assessing whether the market’s next move will be up or down. on the decline.
High-yield bonds and the stock market were on course to end the week a little lower than they started, as the rally that pushed corporate valuations and debt prices higher over the last two months seemed to take a break.
Investors are divided on how “aggressive” the Fed will be in raising interest rates in an effort to cool the economy enough to bring inflation under control, but not so much as to trigger a severe recession. Market moves will be determined by investors’ assumptions about “whether we’ll have a soft landing or see a deeper recession,” McClain said.
This article was originally published in The New York Times.