The rising tide in junk debt markets is lifting all boats -- even ones that looked a little leaky just a few weeks ago.
In the last two weeks, money managers have grown more sanguine about loans and bonds from speculative-grade companies. Funds that buy high-yield bonds posted their biggest inflows of the year in the week ended April 18. That’s helped lift 2018 returns for the securities back into positive territory, and the bump in risk premiums that investors had said was long overdue has essentially been erased.
At the beginning of the month, when oil and stock prices were lower and trade war fears more intense, investors were more hesitant. McDermott International Inc. and American Greetings Corp. borrowed more than $4 billion combined in early April, and they had to pay up. McDermott, which helps oil and gas drillers design and install their equipment, sold $1.3 billion of bonds on April 4 for just 94.75 cents on the dollar, an unusually high discount for a new issue.
Now the securities are trading above 101 cents, according to Trace bond price data. The quick returns on both companies’ bonds and loans show that being choosy in tough times can yield benefits sooner than investors expect, said Andrew Feltus, co-head of high yield at Amundi Pioneer, which managed $1.4 trillion of assets globally as of Sept. 30.
“As long as we’re keeping our discipline, our market can keep gaining,” Feltus said. The debt from McDermott and American Greetings "was priced so low, they were priced to sell," he added.
Risky Deals
There may have been good reason to ask questions about the riskiness of McDermott and American Greetings, according to money managers involved in the deals. McDermott is borrowing to fund its purchase of Chicago Bridge & Iron Co., a money-losing competitor. American Greetings is borrowing as part of a sale of a 60 percent stake to a private equity firm.
“The companies were at the mercy of the market, and the market had been fairly weak,” said John McClain, a portfolio manager who helps oversee $21 billion of assets at Diamond Hill Investment Group. “If you were going to buy it, you were going to make sure it was a winning trade.”
American Greetings’ $470 million of six-year loans sold at 98 cents on the dollar. Those loans are now quoted at around 101 cents. The company’s $282.5 million of seven-year unsecured notes sold at 87 cents, and are now trading above 92 cents, according to Trace. McDermott’s $2.26 billion loan was priced at 98 cents on the dollar, and is now quoted around 100 cents.
A spokesman for McDermott declined to comment, while a representative from American Greetings did not return messages seeking comment.