U.S. high-yield bond sales reached an annual record of $432.4 billion on Tuesday as companies rush to lock in low coupons while they still can.
Cheap funding costs have unleashed a prolonged pile-on of debt issuance, and borrowers have been hurrying to take advantage of the opportunity before the Federal Reserve eventually raises interest rates. That could come sooner than expected amid inflation pressures, though Federal Reserve Chair Jerome Powell is still preaching patience as of last week.
This dash has taken 2021’s issuance beyond 2020’s high mark $431.8 billion, which topped a prior record set in 2012, according to data compiled by Bloomberg.
“Funding markets are wide open,” said Nichole Hammond, a senior portfolio manager at Angel Oak Capital Advisors LLC. “Credit fundamentals are improving with decent economic growth and there is still strong demand for income yielding assets.”
The frenzy might not last much longer. Analysts at Bank of America Corp. think U.S. junk bond issuance will contract by 15% next year as volumes decelerated in recent months. And Goldman Sachs Group Inc. is anticipating a 25% drop to $325 billion in 2022. “With record cash on hand, and a large portion of refinancing already accomplished, 2022 is likely to bring a sharp slowdown in the U.S. high-yield supply versus the past two years,” wrote Goldman Sachs analyst Amanda Lynam.
Cheap Debt
Companies raised billions of dollars of debt at the start of the Covid-19 pandemic as a cash cushion after the U.S. central bank began purchasing some bonds as part of its efforts to prop up corporate credit. And although the Fed announced the end of this program in June, it didn’t dampen investors’ confidence.
Some of the deals driving volumes this year have come from the same companies as they’ve returned to the bond market to refinance those expensive 2020 borrowings with cheaper rates.
Cruise line operator Carnival Corp. tapped the bond and loan markets to refinance costly debt, including a now-repaid 11.5% bond issued near the onset of the pandemic. Royal Caribbean Cruises Ltd. made a similar move, Delta Air Lines Inc. has also started chipping away at its balance sheet, and United Airlines Holdings Inc. borrowed to refinance some liabilities and to bolster cash.
“Companies are looking at today’s rate environment and thinking, ‘Maybe I can’t get that coupon next year, and the liquidity is there, so let me push through my refinancing and get it done,’” said Noel Hebert, director of credit research at Bloomberg Intelligence.
The average yield for the high-yield bond index has remained below 4% for much of this year, hitting record lows in July, according to Bloomberg data. But, it’s been on an upward trajectory as of late, closing at 4.03% as of Monday.