Money managers are having such a tough time getting their hands on debt in the $2.8 trillion market for junk bonds and leveraged loans that they’re calling up companies and pressing them to borrow, instead of waiting for bankers to bring new deals to them.
Investors have driven billions of dollars of these kinds of debt sales this year, including $550 million of bonds from Rackspace Technology Inc. this week, according to people with knowledge of the matter. PetSmart Inc. tried to borrow $4.65 billion in October and failed, but after the junk bond market rallied further after the U.S. election, the retailer found investors beating down its door. It was able to sell bonds and loans in January. Fund managers also pushed US LBM Holdings, a building supply company, to sell notes last month.
The deals typically start with at least one large investor either calling a banker that works with a company, or calling a corporation’s private equity owners directly, and asking for bonds or loans, a process known as a reverse inquiry. Pressing companies to borrow is a role that bankers usually take as they connect corporations and investors.
In a reverse inquiry, the money manager usually promises to buy a certain amount of the debt at a specific price, giving the company more confidence that the transaction will be successful. There’s always some of this activity in the market, but there’s much more happening now, according to bankers, as investors worldwide pile on the risk to gain higher returns in the U.S. and struggle to find enough high-yielding debt to buy.
Many bond offerings have almost sold out before they’re even officially put up for sale. While banks can’t technically make promises to a money manager before starting a debt deal, it’s widely accepted in the market that fund managers that help create a transaction can end up with a larger share of the pie after the process known as allocation.
“Everyone is trying to get a leg up and prove their worth to you so that you will treat them well when allocating a new issue,” said Richard Zogheb, global head of debt capital markets at Citigroup Inc. “We are getting an enormous amount of reverse inquiry.”
Seeking Risk
More than $16.2 trillion of bonds globally carried negative yields as of Thursday, a near record high, as the pandemic continues to drag on interest rates. That’s made investors around the world increasingly eager to buy riskier securities that might pay more yield. In the U.S., January was the third-busiest month ever for junk bond sales, with companies borrowing more than $50 billion thanks to strong demand. It followed a record year for speculative-grade offerings.
Average U.S. junk yields have been driven down to just 4.09% as of Thursday, a record low, according to Bloomberg Barclays index data. That has given companies an incentive to refinance, and to borrow to fund everything from acquisitions to dividend payouts.
But with the economic outlook still uncertain, firms only need so much cash, and there are relatively low levels of acquisitions and buyouts funded by debt. Investors are competing against each other more than usual to get a piece of new deals.