(Bloomberg News) U.S. speculative-grade companies are in the best position ever to meet their debt obligations as investors pour a record $43 billion into high-yield mutual funds and borrowers boost the cash held on balance sheets.
Moody's Investors Service said Aug. 1 its Speculative-Grade Liquidity-Stress index, which falls as corporations' ability to manage cash needs improve, dropped to 3.1 percent in July, beating the previous record low of 3.3 percent in May. The New York-based ratings firm sees the U.S. default rate peaking at 4 percent in October before falling to 3 percent by June 2013, below the historical average of 4.6 percent since 1992.
While the unemployment rate has held above 8 percent since February 2009, demand for high-yield, high-risk bonds has grown as investors speculate that the Federal Reserve will keep interest rates near zero through late 2014 to bolster the economic recovery. Credit Suisse Group AG boosted its forecast for returns this year to a range of 8 percent to 11 percent from 7 percent to 10 percent.
"The access to the market is mainly a function of a lot of demand for yield, but investors would not buy with the same enthusiasm if they really thought there were credit problems looming," Martin Fridson, global credit strategist at BNP Paribas Investment Partners in New York, said in a telephone interview. "The companies are genuinely in good shape."
Junk-bond funds received $9.32 billion of inflows in July, the most since February, sending the 2012 total 30 percent higher than the previous full-year record, according to EPFR Global in Cambridge, Massachusetts. High-yield companies may face tougher borrowing conditions if European policy makers fail to curb soaring yields and the U.S. economy weakens, Moody's said in the Aug. 1 report.
"Liquidity in the market, just in general, it can change on a dime," Scott Roth, U.S. high-yield fund manager at Babson Capital Management LLC, which oversees $149 billion in assets, said in a telephone interview. "There will be times where it will be difficult to finance, and I think that's why when the market is open for business, which it is right now, companies will need to be opportunistic."
Elsewhere in credit markets, Altria Group Inc. and Celgene Corp. led borrowers issuing $12.6 billion of bonds yesterday in the most active start to the week since March 19, according to data compiled by Bloomberg. U.S. banks are relaxing their terms on credit cards and lending for autos and commercial real estate, the Federal Reserve said. Software provider Ceridian Corp. is seeking a $342 million loan to refinance debt.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, fell 1.36 basis points to 19.39 basis points. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
The cost of protecting corporate debt from default in the U.S. fell to an almost three-month low, with the Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses or to speculate on creditworthiness, declining 0.8 basis point to a mid-price of 102.8 basis points, according to prices compiled by Bloomberg. That's the lowest level since the gauge touched 100.9 on May 8.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased one to 149 at 11:34 a.m. in London. Both indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bonds of Caracas-based Petroleos de Venezuela SA were the most actively traded dollar-denominated corporate securities by dealers, with 214 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Altria sold $1.9 billion of 2.85 percent, 10-year notes to yield 130 basis points more than similar-maturity Treasuries and $900 million of 4.25 percent, 30-year bonds with a 168 basis- point spread, Bloomberg data show. The debt may be rated Baa1 by Moody's Investors Service, three levels above speculative grade, the data show.
Celgene, the maker of cancer-fighting drugs Istodax and Abraxane, sold $1.5 billion of bonds in its first offering since October 2010. The company issued $500 million of 1.9 percent, five-year notes to yield 130 basis points more than Treasuries and $1 billion of 3.25 percent, 10-year debt at 170 basis points, Bloomberg data show.