Junk bonds are making a comeback

As the US Federal Reserve (Fed) raises interest rates and seeks to cool the economy with higher borrowing costs, companies perceived as risky have found it more difficult to borrow. But also companies with a low credit rating, whose debt is often mentioned garbage (“Junk”), are now taking advantage of a good opportunity to borrow more money.

Posted at 9:00 am

Joe Rennison
The New York Times

Listed companies, which tend to pay higher interest rates, have sold $4.1 billion worth of bonds in the United States since the start of the week and more deals could be on the way, according to Refinitiv. Junk bond issuance is already at its highest weekly amount since early June, just before investor confidence plummeted, the stock market bottomed and lenders faltered.

A string of better-than-expected corporate earnings and positive economic data have recently boosted equity markets, reducing volatility and dampening some investors’ expectations of the Fed’s rate hike campaign. The junk bond market has also started to thaw, with this week’s issuance exceeding all of July’s total.

Still, bankers and investors are warning that these risky borrowers looking for new funds could be running out of time. Companies with debt and lender payments coming due have jumped at the opportunity to refinance.

“Depending on your view of the broader economy, this could be a very good opportunity to take advantage of the market,” said John Gregory, managing director at Wells Fargo Securities.

Troubled cruise line Royal Caribbean raised $1.25 billion Monday and paid a hefty 11.63% interest rate. The company will use part of the money to repay investors who lent it a $650 million loan in 2012 that matures in November. When it borrowed that money before the pandemic shut down the cruise industry, the company had an interest rate of 5.25%.

The recent surge in issuance was helped by four straight weeks of inflows into funds buying high yield bonds, the longest in almost a year.

Fear of seeing the market fall turned into fear of missing out.

John McClain, portfolio manager at Brandywine Global Investment Management

However, the market remained closed to the riskiest issuers. Junk bond issuers have credit ratings ranging from BB to CCC, the lowest. Since the end of April there has only been one company with a CCC rating.

On Thursday, S&P Global Ratings said it expects 3.5% of junk bond issuers to default on debt over the next 12 months, more than double the 1.4% rate seen in the year was recorded until June 2022. According to ICE Data Services, about $90 billion, or 6% of the junk bond market, remains in default, meaning it’s trading at a yield higher than government bonds.

Nick Kraemer, an analyst at S&P Global Ratings, says the lack of a “lending rush” on the riskiest companies signals some caution on the part of investors assessing whether the market’s next move will be up or down.

High yield bonds and the stock market were on track to end the week slightly lower than they started as the rally that had been pushing corporate valuations and debt prices higher for the past two months appeared to be pausing.

Investors are divided on how “aggressively” the Fed will raise interest rates to cool the economy enough to bring inflation under control, but not so much to trigger a deep recession. Market moves are driven by investors’ assumptions about “whether we’re going to have a soft landing or a deeper recession,” McClain said.

This article was originally published in The New York Times.

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