Overall, credit markets saw several new deals this week from risky, pandemic-plagued companies like United Airlines Holdings Inc. and Sizzling Platter LLC, which operates restaurants including Dunkin’ Donuts, Little Caesars and Red Robin. These borrowers are clearly looking to lock in financing before potential volatility around the U.S. election. Investors should be wary about these shoehorned offerings.
There’s no question that this has been a strange crisis. On the one hand, large companies have had no trouble selling bonds at near record-low yield levels, with 2020 investment-grade issuance currently at $1.6 trillion and high yield at $357 billion. Yet there have also been more than 200 bankruptcy filings by businesses with more than $50 million in liabilities, the most since 2009, according to data compiled by Bloomberg.
While Chapter 11 cases have steadied in recent weeks after spiking during the summer, it’s an open question whether that will last as the country heads into the coldest months of the year; cases are already starting to surge in states from Vermont to Wisconsin to New Mexico. BlackRock Inc. is among those who say the scale of restructuring across the globe could exceed the previous peak that followed the 2008 financial crisis. “One big reason is the significant growth in sub-investment grade debt,” the BlackRock Investment Institute said in a note this week.
The Federal Reserve’s unprecedented foray into credit markets has staved off a worst-case scenario. But that’s not the same as saying vulnerable companies are out of the woods. Dave & Buster’s shares jumped 7.4% on Monday and 8.2% on Tuesday, reaching $18.79, up from as low as $4.61 in mid-March. Some analysts say the new bonds “remove our primary concern and a key overhang.” While liquidity is important, to focus entirely on that seems shortsighted. Philip Brendel, a distressed credit analyst with Bloomberg Intelligence, has a more sobering view of indoor entertainment venues. “Barring Herculean turnarounds, they may just be Chapter 11 filers in ’21 or ’22,” he said.
With high-yield spreads back near pre-pandemic levels, investors would be wise to tread carefully. They already pushed back against two junk-bond sales last week. It stands to reason that borrowers should be more keen to sweeten terms in return for locking in funding before Nov. 3.
But most important, investors need to remember that speculative-grade companies aren’t immune from going bust, no matter how wide open the debt markets might be. Junk-rated bonds, backed by a business that can’t make it through the pandemic, are just junk.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.