In at least one important way, President Trump’s decision to browbeat the Fed into pausing its program of interest-rate hikes is paying off bigly for America’s most vulnerable corporate borrowers.
The Fed’s decision to ‘pause’ interest rate hikes comes as nearly one-third of the entire $1.2 trillion US high-yield market is slated for maturity over the next four years. That’s a record proportion, according to a team of strategists at Barclays led by Bradley Rogoff, and compares with a post-2000 average of just 20%. And after the historic market ‘freeze’ late last year where not a single high-yield bond was issued, corporate America has apparently got the message: Now is the time to strike while the iron is hot. The more speculative-grade the rating, the more important it is for companies to act now to refinance that debt.
Though many companies have years to plan on refinancing (almost none will pay off their debt tabs entirely), many are choosing to refinance now, while rates are low, and demand for higher-yielding debt is high. Junk bonds tanked last week as markets shunned risky assets, but this didn’t dampen buyers’ appetite: Last week was the biggest week for issuance in nearly two years, with junk issuers selling $12 billion. So far this year, more than $80 billion of bonds that listed refinancing in the prospectus have been issued. That has accounted for more than 70% of the issuance so far this year, according to Bloomberg.
And while credit analysts at some of the bigger fund managers insist that this is ‘healthy’, they seem to have neglected the fact that the president has effectively given corporations a green light to continue on their debt binge by effectively putting off their day of reckoning until the Democrats take back control of the White House.
The message is unequivocal: With so many companies teetering on the brink of being downgraded into speculative-grade territory, junk issuers hoping for the best possible rate need to act fast.
“Companies are extending maturities out, and that’s healthy,” said Scott Roberts, head of high-yield debt at Invesco Ltd. Refinancing is a better use of debt than buying back shares, he added. “I’ve seen frothy before and this is not it.”
“I feel good about this high-yield market and we are trying to push issuers to take advantage of it,” said Richard Zogheb, global head of debt capital markets at Citigroup Inc. “Investors are so excited now that the underlying rate environment is more dovish, and that’s really good news for high-yield borrowers.”
Companies that backed out of their issuance plans late last year during the sudden market drought are beginning to realize that ‘market conditions’ probably aren’t going to get much better than they are now.
“We had half a dozen companies that were planning to go as early as nine or 10 months ago, then the market started weakening and we never got to the point where we could do those deals,” said John Gregory, head of leveraged-finance syndicate at Wells Fargo & Co., referring to when junk bond prices fell late last year. “Now we’re finally getting to that point.”
What’s more, floating-rate leveraged loans have become less attractive thanks to the Fed’s capitulation, creating something of a perfect storm for the junk-bond market, which is great for heavily indebted companies hoping to lock in the lowest possible interest rate.
“I can’t remember when $5 billion worth of deals came in one day,” said Matt Eagan, a portfolio manager at Loomis Sayles & Co.
“The market is generally wide open for issuers,” said Jenny Lee, co-head of leveraged loan and high-yield capital markets at JPMorgan Chase & Co. “We’re advising issuer clients to look harder at doing high-yield bonds.”
Even if borrowers truly can’t afford it, the longer they can delay their day of reckoning, the greater the chance that the Fed takes care of their obligations for them when the central bank inevitably pivots to buying corporate debt – as former Fed Chairwoman Janet Yellen recently suggested – during QE4.